Yield Tracker

DEVELOPMENTS abroad caused yields on government securities (GS) to end flat last week as investors awaited the pronouncements from the US central bank on the direction of its monetary policy moving forward.

Week on week, government securities yields were up by 2.2 basis points (bp) on average, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates as of Aug. 23 published on the Philippine Dealing System’s website.

Yield movements among the tenors were mixed at the secondary market on Friday. At the short end of the yield curve, the 91-, 182- and 364-day Treasury bills (T-bill) went down by 5.1 bps, 3.5 bps, and 3.4 bps to fetch 3.325%, 3.477%, and 3.679%, respectively.

At the belly, yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bond) went up by 0.7 bp to 3.897%, 3.2 bps to 3.994%, 5.1 bps to 4.086%, 6.5 bps to 4.174%, and 7.2 bps to 4.326%, respectively.

Yields were likewise up at the long end with rates of the 10-, 20-, and 25-year debt papers climbing by 7.8 bps (4.478%), 3 bps (4.834%), and 2.7 bps (4.828%), respectively.

“Local bond yields rose [last] week as the market braced for the US Federal Reserve Chair Jerome Powell’s statement at the annual Jackson Hole symposium…,” said Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, Inc. (UnionBank).

“Dissenting views in the [Fed] against lower rates have rendered the expected dovish tone [of Mr. Powell] rather uncertain. Thus, most market players were either staying on the sidelines or trimming positions also ahead of the long weekend,” Mr. Asuncion said.

Rizal Commercial Banking Corp. economist Michael L. Ricafort meanwhile said markets are anticipating another Fed interest rate cut as early as its policy meeting next month amid slower global economic growth.

Investors widely expect the Fed to cut rates again in September. Investors have been on the lookout for Mr. Powell’s speech last Friday at the US central bank’s annual central banking conference in Jackson Hole, Wyoming.

Mr. Powell said the central bank would “act as appropriate” to keep the US economy healthy in a deteriorating global economy, but stopped short of committing to rapid-fire rate cuts and drew fire from US President Donald Trump.

Mr. Powell had barely completed a key Friday morning speech when Mr. Trump ratcheted up his war of words against both the Fed chair he appointed, and with China, which earlier on Friday had retaliated to US tariffs with its own import taxes on American crude oil, agricultural products and small aircraft.

The rapid escalation, which tanked stock markets and drove bond yields lower even before Trump raised the ante with additional tariffs on China, could force the Fed to cut rates to keep the 10-year expansion under way.

Indeed, data reported as Mr. Powell was speaking on Friday showed further deterioration in the US housing market, on the heels of figures earlier in the week showing weakness in the manufacturing sector.

But the message from both Mr. Powell and his second in command, vice chair Richard Clarida, was that while the Fed may be willing to cut to protect the recovery, it made no promises.

The Fed cut rates for the first time in more than a decade last month, backing Mr. Powell’s verbal commitment to sustain the expansion with action. Mr. Powell on Friday made clear that commitment is still in place in a speech he gave at an annual Fed retreat at a Jackson Hole valley resort set against the Grand Teton mountains.

He said there are “significant” risks to the economy, including the trade dispute, the chaotic British exit from the European Union, tension in Hong Kong and signs of a global economic slowdown.

But he also said the domestic US economy is in a “favorable place” now and he stressed limits to the Fed’s ability to respond to the trade issues. He also said officials need to “look through” short-term turbulence, and stopped short of endorsing or signaling the pace and depth of rate cuts markets widely expect and that Mr. Trump has demanded.

There are “no recent precedents to guide any policy response to the current situation,” Mr. Powell said, adding that monetary policy “cannot provide a settled rulebook for international trade.”

UnionBank’s Mr. Asuncion said market players who were trimming positions “may have pushed shorter tenors to fall” as Mr. Powell’s statement was “expected to give more guidance to markets.”

In addition to the Fed, the latest samurai bond issuance by the national government this month also played a role in bond yield movements, RCBC’s Mr. Ricafort said.

“[T]his…reduced the need for the government to borrow from the domestic market, thereby supporting relatively lower local interest rate benchmarks recently,” Mr. Ricafort said.

The government raised ¥92 billion ($860 million or P44.3 billion) from the sale of samurai bonds across four tenors earlier this month amid strong demand from investors.

The Philippines, one of Asia’s most active sovereign bond issuers, plans to borrow P1.189 trillion this year. Documents from the latest Development Budget Coordination Committee meeting showed 75% of total borrowings will be sourced domestically, while the balance will be from foreign creditors.

This will be used to fund a budget deficit programmed at P624.4 billion, equivalent to 3.2% of gross domestic product, and support increased government spending programmed at P3.774 trillion.

The government returned to offshore market twice in May, raising €750 million ($842.33 million) in eight-year global bonds, as well as 2.5 billion renminbi ($363.3 million) in three-year “panda” bonds.

In January, the Philippines also sold $1.5 billion in 10-year offshore dollar bonds.

Moving forward, UnionBank’s Mr. Asuncion said Mr. Powell’s Jackson Hole statement “will weigh heavily” on how yields will move this week.

“Expect more market activity and players moving to push yields lower,” he said.

For RCBC’s Mr. Ricafort: “Market expectations of further easing trend in inflation to one-percent levels as early as August to October could also help sustain the easing trend in short-term tenors.”

“Markets would also take cue from the relatively-low bond yield benchmarks recently in the US and in other developed countries (new record lows recently, near zero percent or deeper into negative percent territory), an important lead for long-term local interest rate benchmarks, especially if markets stabilize and some global funds resume their search for higher yields/returns in emerging markets with better economic and credit fundamentals such as the Philippines,” he added. — Lourdes O. Pilar with Reuters