Yield Tracker

By Mark T. Amoguis
Senior Researcher

YIELDS ON government securities (GS) edged lower as they continued to track US Treasuries’ decline due to a possible Federal Reserve rate cut within the year.

GS yields, which move opposite to prices, dropped by a week-on-week average of 17.3 basis points, the PHP Bloomberg Valuation Service Reference Rates as of June 14 published on the Philippine Dealing System’s Web site showed.

Nicholas Antonio T. Mapa, senior economist at ING Bank NV-Manila Branch, said the local bond market continued to take its cue from the movement of the US Treasuries, which have been edging lower due to expectations that the US Federal Reserve will cut policy rates this year.

“Economic data out from the US bolstered the chances for a Fed cut, pushing Treasuries lower and dragging global bonds with them,” Mr. Mapa said in an e-mail interview on Friday.

“Reports that the BTr (Bureau of the Treasury) would be borrowing less in 3Q also pushed the rally further, although some profit-taking began to take place to close the week,” he added.

“Market expectations of a possible cut in fed funds rate this year have also supported the recent easing of most local interest rate benchmarks, especially short-term tenors,” Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), said in a separate e-mail.

Last week, Reuters reported that US inflation in May went up by 0.1% from 0.3% in April. Core inflation for that month increased by 0.1% for the fourth consecutive month.

In a separate Reuters report, initial claims for state unemployment benefits rose by 3,000 to a seasonally adjusted 222,000 for the week ended June 8 against a market consensus of a decreasing trend to 216,000.

These developments could bolster the case for the Fed to trim interest rates this year. Yields on two-year debt, which are a proxy for market expectations of rate moves, dropped the most across maturities, and were last down by 2.1 bps to 1.868%, Reuters said.

On the local front, National Treasurer Rosalia V. De Leon said last week that borrowings in the third quarter will likely be lower than the P315-billion program during the April to June period amid slow government spending seen earlier this year.

Ms. De Leon said the government has more than enough cash to finance the “sustained” higher spending for the next quarter or so.

At the close of the trading last Friday, bond yields on almost all benchmark tenors dropped except for the 10-year bond, which increased by 3.1 bps to 5.248%.

The three-month, six-month, and one-year debt were down by 40 bps, 41.0 bps, and 24.4 bps, respectively, to fetch 4.642%, 4.935%, and 5.213%.

The two-, three-, four-, five-, and seven-year Treasury bonds also declined by 17.2 bps, 13.9 bps, 10.9 bps, 8.3 bps, and 4.2 bps, respectively, to yield 5.099%, 5.119%, 5.140%, 5.163%, and 5.211%.

Yields on 20- and 25-year notes likewise dipped by 11.4 bps and 22.4 bps, respectively, to 5.378% and 5.509%.

For this week, economists said the market may take cues from the policy meetings of the Bangko Sentral ng Pilipinas’ (BSP) Monetary Board (MB) and the Fed’s Federal Open Market Committee (FOMC).

“BTr’s canceled T-bond auction may entice some more action, although most dealers will likely look for clues to the BSP’s decision, with the market split on whether the BSP will cut or stay,” ING’s Mr. Mapa said.

“Philippine local interest rate benchmarks (PHP BVAL yields) could continue their recent downward trend in the coming week especially if there would be another cut in local policy rates on June 20, 2019 and if benchmark bond yields in the US and in other developed countries continue to ease as well and if global oil prices remained relatively low (at four-month lows recently) that could help further ease inflation,” RCBC’s Mr. Ricafort said.

Inflation stood at 3.2% last month from 3% in April but lower than the 4.6% last year, bucking the six consecutive month of slowing down. This brought the year-to-date average to 3.6%, still within the 2-4% target range of the BSP but above the 2.9% full-year forecast.

Currently, policy rates are in the 4-5% range after the MB slashed benchmark interest rates by 25 bps in May. The move partially dialed back a cumulative 175-bp hike to benchmark rates last year as the central bank tempered increasing inflation expectations after inflation surged to 6.7% in September and October last year.

Meanwhile, in a notice posted on its website, the BTr said it canceled the auction of seven-year bonds scheduled on June 26.