Yields on gov’t securities drop on thin trading

By Jochebed B. Gonzales, Senior Researcher
DOMESTIC BOND yields fell on thin trading after the Bangko Sentral ng Pilipinas (BSP) trimmed bank reserve requirements by one percentage point, and amid stronger chances of a US rate hike in June.
Prices rose as yields on government securities declined by 19.58 basis points (bps) on the average week on week, data from the Philippine Dealing & Exchange Corp. as of May 25 showed.
“Activity was largely limited [last] week as the local bond market looked for movement from the release of the US FOMC (Federal Open Market Committee) meeting minutes that indicated a definite trend toward rates hiking but to a rather slower pace,” said Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines (UnionBank).
Minutes of the May 1-2 FOMC meeting released last week revealed the probability of a June liftoff increasing to 90% with staff projections suggesting that the US economy was expanding at an “above-trend pace.”
“People are really afraid to position right now, waiting what will happen to yields abroad,” said Reginald R. Reyes, trust trader at the Rizal Commercial Banking Corp.’s (RCBC) Trust and Investments Group.
He said trading last week was “very light” with market players being cautious of the developments in the US, including its trade war with China and uncertainty over talks with North Korea.
On the domestic front, the BSP’s announcement of a reduction in the reserve requirement ratio (RRR) by one percentage point to 18% next month drove yields lower towards the end of the week.
“Government securities [yields] were down by an average of 6-15 bps across the board with more emphasis on the short end after the surprise 1% RRR cut effective June 1, 2018 which is expected to release P90 billion of liquidity back into the market,” said Carlyn Therese X. Dulay, Head of Institutional Sales at Security Bank Corp.
“Market participants began to show better bids even after the Bureau of the Treasury (BTr) announced a new Retail Treasury Bond (RTB) with a tenor of three years to be auctioned off at the end of the month,” she added.
The government is looking to raise at least P30 billion via RTBs which will be priced on Wednesday. A public offering is expected to last until June 8 unless the BTr chooses to cut short the offer period.
At the secondary market on Friday, yields went down across all tenors except for the 20-year yield which gained 4.03 bps to 7.2921%.
The declines were led by the 10-year treasury whose yield shed 63.30 bps, closing with 6.1116%. It was followed by the four-year yield which lost 49.88 bps to 5.1887%.
The 182- and 364-day Treasury bills (T-bills) as well as the two-, three- and five-year bonds also saw double-digit decreases in yields, by 14.30 bps, 11.34 bps, 20.41 bps, 12.35 bps and 16.08 bps, respectively, finishing with 3.7710%, 4.0467%, 4.2522%, 4.6076% and 5.5069%.
Meanwhile, the 91-day T-bill and seven-year bond only dipped by 6.63 bps and 5.55 bps, respectively, to 3.3886% and 5.8445%.
“Market is seen to be taking in the RRR cut impact. Trading [this] week is expected to be muted with lack of domestic leads. However, external factors are seen to move markets,” said UnionBank’s Mr. Asuncion.
RCBC’s Mr. Reyes and Security Bank’s Ms. Dulay were also seeing market players on the sidelines for most of the week until the launching of the RTBs.
“It’s still going to be muted until the auction on May 30,” said Mr. Reyes.
For Ms. Dulay, “Expect yields to remain range-bound until the RTB is priced.”