Yield Tracker

By Mark T. Amoguis
Senior Researcher

YIELDS ON government securities (GS) ended flat last week, mirroring the safe-haven US Treasuries as they dropped on the back of ongoing trade war between the world’s two largest economies.

GS yields, which move opposite to prices, declined by a week-on-week average of 7.9 basis points (bps), the PHP Bloomberg Valuation Service Reference Rates as of May 24 published on the Philippine Dealing System’s Web site showed.

“GS yields tracked the move of US Treasuries which dipped in reaction to escalating trade tension with the US and China trading tariffs recently. Risk-off tone forced dealers into relatively safer assets,” ING Bank NV Manila Branch senior economist Nicholas Antonio T. Mapa said in an e-mail.

“Market players were also reacting to the move of the BSP (Bangko Sentral ng Pilipinas) to reduce RRR (reserve requirement ratio) for smaller banks, a move well telegraphed and received by the market given the downward trajectory for inflation,” he added.

“With the US Fed[eral Reserve] minutes showing a patient policy stance and US Treasury yields nearing year-to-date lows, local bond market yields tracked foreign market counterparts. The recent announcements on the BSP cuts in small banks reserve ratio did not have much impact on government securities,” UnionBank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion said in a separate e-mail interview.

Last week’s movement was due to “improved liquidity due to looming effectivity of RRR (reserve requirement ratio) cuts, better CPI (consumer price index) outlook for the rest of the year, and slower growth as signaled by less government spending in April,” a bond trader said via text message last Friday.

Due to the trade war between the world’s two largest economies, US Treasury yields dropped across the board last week with US 30-year bond yields sinking to roughly 16-month lows, while those on benchmark 10-year notes fell to their lowest level since December 2017, according to a Reuters report.

Back home, after cutting the reserve requirement of big banks last May 16, the BSP’s policy-making Monetary Board on Thursday likewise announced a cut in the RRR of thrift, rural, and cooperative banks.

Thrift banks’ RRR will be gradually slashed by 200 bps to six percent from eight percent in three moves: 100 bps effective May 31, 50 bps effective June 28, and 50 bps effective July 26.

Mandatory deposit reserves of rural and cooperative banks will also be trimmed by 100 bps to four percent from five percent effective May 31.

A percentage point cut in big banks’ RRR will free up to P90-100 billion, while that for smaller banks will unleash around P22 billion into the financial system.

At the close of the trading last Friday, GS yields went down across the board. Three-month, six-month, and one-year debt were down by 15.5 bps, 9 bps, and 7.3 bps, respectively, to fetch 5.359%, 5.694%, and 5.895%.

The two-, three-, four-, five-, and seven-year bonds also declined by 12.0 bps, 8.5 bps, 5.8 bps, 4.3 bps, and 4.7 bps, respectively, to yield 5.674%, 5.673%, 5.682%, 5.696%, and 5.716%.

Yields on the 10-, 20-, and 25-year notes likewise dipped by 7.9 bps, 8.4 bps, and 3.2 bps, respectively, to 5.709%, 5.867%, and 6.014%.

Market watchers pointed to the central bank’s May inflation forecast as the likely catalyst for this week’s trading.

The bond trader expects “steady tone with downward bias” on GS yields movement this week.

“Market will still be waiting for significant market movers [this] week. At this point, the external environment has been largely influencing the GS yields’ performance,” UnionBank’s Mr. Asuncion said.

“Market players will likely take their cue from the overall global sentiment, BSP’s inflation forecast for May inflation and on the 10-year auction [this] week,” ING’s Mr. Mapa said.

The Bureau of the Treasury will offer P15 billion worth of Treasury bills today. It will also auction off reissued 10-year Treasury bonds with a remaining life of nine years and seven months tomorrow.