Yield Tracker

By Lourdes O. Pilar

YIELDS ON government securities (GS) fell last week as market players reacted to another cut in banks’ reserve requirement ratios (RRR).

Debt yields went down by an average of 1.4 basis points (bp) on a week-on-week basis, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates published on the Philippine Dealing System’s website last Oct. 25.

“Local yields slightly fell as participants noted the BSP’s (Bangko Sentral ng Pilipinas) latest announcement of another 100-bp reduction in the RRR on December this year and including some movement ahead of a similar reduction effective next month,” a bond trader said in an e-mail interview.

“There was also strong downward pressure on the longer end of the yield curve due to safe-haven demand from lingering geopolitical uncertainties abroad,” the bond trader added.

In a separate email, ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro noted that GS yields initially went up “in the absence of fresh catalysts.”

“With inflation expected to move gradually higher beginning November and global yields consolidating, we saw some profit taking. This reversed as the announcement of the most recent cut in the RRR caused a flurry of buying, particularly on the longer-end of the yield curve which had adjusted higher over the last couple of weeks,” Mr. Liboro explained.

In a statement last Thursday, the BSP said its policy-setting Monetary Board decided to slash the RRR of universal, commercial and thrift banks by another 100 bps, bringing total reductions to their reserve ratios for this year to 400 bps.

This marked the fourth time the central bank has cut the banks’ RRR, with the latest reduction to take effect in December. This will follow a 100-bp reduction announced on Sept. 27 that takes effect next month and will bring the reserve ratio of universal and commercial lenders to 14% and the RRR of thrift banks to four percent.

The reserve ratio of rural banks, which will go down to three percent next month, was left untouched, while those of non-bank financial institutions with quasi-banking functions will be cut to 14% by December.

With the exception of the 91-day and seven-year debt papers, all tenors rallied at the secondary market last Friday.

At the short end, the 182- and 364-day Treasury bills (T-bills) went down by 0.6 bp and 2.9 bps to yield 3.264% and 3.608%, respectively.

At the belly of the curve, the rates of the two-, three-, four-, and five-year Treasury bonds (T-bonds) declined by 2 bps (3.890%); 2.4 bps (4.026%); 2 bps (4.164%), and one basis point (4.303%), respectively.

Meanwhile, at the long end, the 10-, 20-, and 25-year T-bonds saw their yields go down by 3.3 bps (4.705%), 3.4 bps (5.039%); and 1.7 bps (5.037%).

On the other hand, the rate of the 91-day and 7-year debt papers went up by 3 bps (3.142%) and 0.6 bp (4.528%), respectively.

For this week, ATRAM Trust’s Mr. Liboro said the seven-year auction “is likely to be well-supported” given the “increased buying sentiment in the market.”

“Markets are pricing in an interest rate cut and any risk of disappointment is likely to cause a move higher in global yields which could feed into the local bond market,” Mr. Liboro said, adding that the US Federal Reserve’s policy meeting at the end of this month “could add to the volatility.”

For the bond trader: “[Y]ields might continue to move with a downward bias [this week] on expectations of further easing by the US Federal Reserve and the Bank of Japan.”

“Yields might also fall amid possibly weaker US and Eurozone GDP (gross domestic product) data as well as lingering Brexit uncertainties,” the bond trader added.