Yield Tracker

By Christine J.S. Castañeda
Senior Researcher

YIELDS on government securities (GS) went down last week as they tracked the movement of US Treasuries following dovish remarks from the Federal Reserve.

On average, debt yields — which move opposite to prices — went down by 26.6 basis points (bp) week-on-week, according to the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of June 7 published on the Philippine Dealing System’s website.

“[M]arket [tracked] the movement of US Treasuries given the outlook for the Fed to cut rates within the year,” Nicholas Antonio T. Mapa, senior economist at ING Bank N.V.’s Manila branch, said in an email.

“Higher-than-expected inflation for May did little to deter bond bulls with BSP (Bangko Sentral ng Pilipinas) Governor indicating that rate cuts were still likely, although he did pledge to remain faithful to being data dependent,” he added.

“With BSP holding on to its 2.9% inflation forecast for the year and the 3.1% in 2020, market saw more reason to drive the rally further given the dovish Fed,” Mr. Mapa said.

Meanwhile, Michael L. Ricafort, economist at the Rizal Commercial Banking Corp. (RCBC), said GS yields declined “despite the slight uptick in the latest inflation data after some Federal Reserve officials already signaled openness to Fed rate cuts.”

On Tuesday, Fed Chair Jerome Powell said in a speech that the US central bank is “closely monitoring the implications” of Washington’s ongoing trade tensions with China and Mexico on the US economy and “will act as appropriate to sustain the expansion” amid a robust labor market and with inflation within its two percent target.

This comes after St. Louis Fed President James Bullard said a cut in interest rates “may be warranted soon” to help re-center inflation at target and counter the risks from an escalating trade war.

On the other hand, headline inflation stood at 3.2% in May, faster than the previous month’s 3% but still lower than the 4.6% posted a year ago, Philippine Statistics Authority data showed.

The latest inflation print fell within the BSP’s 2.8-3.6% estimate range for the month but was higher than the 3% median in a BusinessWorld poll of 11 economists.

The May print caused inflation to average at 3.6% for the first five months, past the midpoint of the central bank’s 2-4% target range and also above the 2.9% full-year forecast average.

BSP Deputy Governor Diwa C. Guinigundo said following the release of latest inflation data that drivers of price increases “remain on the supply side and therefore generally temporary.”

At the close of trading last Friday, GS yields went down across the board. The 91-day Treasury bill went down by 25.6 bps to yield 5.042%. The 182- and 364-day debt papers likewise declined by 22.4 bps and 21.3 bps, respectively, to fetch 5.345% and 5.457%.

Rates of the two-, three- and four-year bonds also went down by 25.8 bps (5.271%), 26.9 bps (5.258%) and 28.3 bps (5.249%), respectively. Yields on the five- and seven-year debt papers likewise dropped 29.5 bps (5.246%) and 30.6 bps (5.253%).

Yields on the 10-, 20- and 25-year notes also went down by 33.1 bps, 25.9 bps and 22.9 bps, respectively, to end at 5.217%, 5.492% and 5.733%.

For this week, RCBC’s Mr. Ricafort said: “[L]ocal interest rate benchmarks (PHP BVAL yields) could still continue the easing momentum/trend as seen for seven straight weeks already for most tenors specially if global crude oil prices at the very least sustain among four-month lows or if they ease further, that may support further easing of both inflation and local interest rates.”

For ING’s Mr. Mapa: “Market will continue to take its cue from the movement of Treasuries as the market for US bonds, in turn, take their cue from global growth prospects and the Fed dot plot.”

“We have a fresh 20-year bond auction [this week] which should give some indication of investors’ demand for the long end,” he added.

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