Yields on government debt end higher as market corrects

By Carmina Angelica V. Olano
Researcher

YIELDS ON government securities (GS) traded on the secondary market continued to climb slightly last week due to the market’s correction after significant declines seen last month.

On average, GS yields went up by 5.1 basis points (bp) week on week, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates as of April 12 published on the Philippine Dealing System’s website.

Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), said in an email that yields on the five- to 30-year tenors rose the most week on week, continuing a “heathy” upward correction following a series of relatively bigger weekly declines in March 2019.

“Most of the long-term local interest rate benchmarks (PHP BVAL yields) again corrected slightly higher week-on-week…again somewhat in line with the slight/healthy upward correction in the government bond yields in the US and in other developed countries, after global crude oil prices went up to new five-month highs recently and possible positive developments/deal/agreement in the US-China trade talks within a month, as earlier signaled by US President Trump,” Mr. Ricafort said.

The US president told reporters earlier this month that US and China could reach a trade deal possibly within four weeks. During the US and China talks in Beijing last March, the countries underwent intense negotiations to end the trade war that has rattled global markets since mid-2018.

A bond trader said in a mobile message that yields went up last week due to investors’ profit-taking amid a lack of significant market developments.

“[It was] just profit taking and dealers preferring cash for liquidity ahead long weekend…Because yields already moved so much (lower in the past month) and people will likely wait for more data/clue,” he said.

Meanwhile, RCBC’s Mr. Ricafort noted that yields on debt papers at the short end of the curve declined on expectations the Bangko Sentral ng Pilipinas (BSP) will cut its key policy rates and banks’ reserve requirements as early as its May 9 meeting.

“[M]ost short-term local interest rate benchmarks were slightly lower week-on-week, after the latest signals from local monetary authorities about possible monetary easing as early as the next monetary policy-setting meeting on May 9, 2019 amid easing trend in inflation,” he said.

“The stronger peso exchange rate also supported positive market sentiment, as this may also help further easing inflation in the coming months in terms of lower costs of imports (assuming all other factors are the same),” Mr. Ricafort added.

BSP Governor Benjamin E. Diokno said on Friday at the sidelines of the World Bank and International Monetary Fund spring meetings in Washington D.C. that a cut in policy interest rates will be considered during the Monetary Board’s (MB) third policy review this year.

Although inflation is “under control” right now, Mr. Diokno said risks brought by rising global oil prices, El Niño’s impact on food prices, and the US-China trade war could force monetary authorities to again hold off easing policy rates.

The MB maintained benchmark rates and banks’ reserve requirement ratio (RRR) in its first and second policy reviews on Feb. 7 and March 21 but cut the central bank’s headline inflation forecast for 2019 by a percentage point in each of those meetings to a flat three percent as of late.

Policy rates are now at 4.35% for overnight deposit, a decade-high 4.75% for overnight reverse repurchase and 5.25% for overnight lending after a total of 175-bp increase last year, while the RRR for big banks stands at 18% after cuts totalling 200 bps also in 2018.

Treasury-bills (T-bills) eased except for the 364-day debt papers, which yielded 6.087%, up 1 bp from week ago levels. The 91-day and 182-day T-bills’ rates went down 3.4 bps and 1.2 bp to 5.727% and 5.954%, respectively.

Bonds at the belly of the curve climbed across the board. The two-year, three-year and four-year Treasury bonds (T-bonds) yielded 5.931%, 5.871%, and 5.836%, up 3.8 bps, 5.5 bps and 7.7 bps, respectively. Similarly, the five-, seven-, 10-year papers were quoted at 5.826%, 5.865%, and 5.955%, which were 9.5 bps, 9.9 bps and 8.5 bps higher week on week, respectively.

Yields on the longer-term debt papers also rose, with the 20- and 25-year bonds yielding 6.025% and 6.202%, up 6.5 bps and 8.2 bps, respectively, from a week ago.

For this week, the bond trader expects yields to “move sideways as dealers [are] on shortened work week.”

“Dealers would likely prefer to wait for more clues and just stay on the sidelines. No major movement expected ahead of long weekend.”

For his part, RCBC’s Ricafort said that for the coming weeks, “local interest rate benchmarks could mostly start to ease again, after two straight weeks of healthy upward correction.”

“[This is] due to peculiar local catalysts such as the deadline for BIR (Bureau of Internal Revenue) tax payments that may seasonally increase the revenues and cash position of the national government (government may need to borrow less from the market through the issuance of government securities),” he said.

“The recent appreciation in the peso exchange rate versus the US dollar…could help in further easing of inflation by way of lower importation costs. The latest signals from local monetary authorities about possible monetary easing as early as the May 9, 2019 monetary policy-setting meeting may also lead to some declines in most local interest rate benchmarks in the coming week,” Mr. Ricafort added.