Yield Tracker

By Lourdes O. Pilar

GOVERNMENT BOND yields barely changed last week even with lower inflation and faster-than-expected economic growth in the third quarter.

Debt yields, which move opposite to prices, went down by 0.4 basis point (bp) on average week-on-week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates of Nov. 8 published on the Philippine Dealing System’s website.

Yields on Treasury bills (T-bill) fell across the board, led by the 364-day T-bill with a 3.7-bp decline to 3.578%. This was followed by the 91- and 182-day T-bills, which dropped one basis point and 0.8 bp to yield 3.162% and 3.3%, respectively.

Bonds at the belly of the curve also went down. The two- and three-year Treasury bonds (T-bonds) yielded 3.877% and 3.997%, down 0.4 bp and 0.2 bp, respectively. Similarly, the four-, five-, and seven-year papers yielded 4.125%, 4.253%, and 4.466%, which were lower by 0.1 bp, 0.6 bp, and 1.3 bps week on week.

On the other hand, yields on longer-term T-bonds went up, with the 10-, 20-, and 25-year debt papers yielding 4.674%, 5.094%, and 5.108%, up by 0.5 bp, 1.2 bps, and 2.1 bps, respectively, from a week ago.

“[Y]ields may have been nearly sideways week-on-week as inflation is already widely expected by the financial markets to have bottomed out in October 2019 at 0.8%…due to the easing high base/denominator effects starting November 2019,” said Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort in an e-mail interview.

“Local benchmark yields were also nearly steady with minimal changes week-on-week after the stronger-than-expected Philippine gross domestic product (GDP) growth data of 6.2% year-on-year in [third quarter of 2019], the highest so far [this year] and above market expectations of about six percent, as this may have been an offsetting factor to the slight easing in the latest inflation data and the softer data on imports and exports,” he added.

In a separate e-mail, a bond trader said yields on the short- and medium-term tenors mostly declined after the Bangko Sentral ng Pilipinas (BSP) reduced the reserve requirement ratio (RRR) by another 100 bps effective this month, as well as from market expectations of subdued domestic inflation for October.

The reserve ratio of universal and commercial banks (U/KBs) now stands at 15% following the effectivity of the 100-bp cut in the RRR that was announced in September. Meanwhile, the RRRs of thrift banks and rural banks are now at five percent and three percent, respectively.

The BSP announced last month that the reserve ratio of universal, commercial and thrift banks will be slashed by another 100 bps effective December, bringing total reductions to their reserve ratios for this year to 400 bps. This cut will also apply to the reserve ratio of non-bank financial institutions and quasi-banking functions (NBQBs).

This will bring the RRRs of U/KBs and thrift banks to 14% and four percent by December, respectively. On the other hand, the reserve ratio of NBQBs will be cut to 14% next month.

Meanwhile, the Philippine Statistics Authority (PSA) reported last Tuesday the headline inflation decelerated to 0.8% in October from 0.9% in September, the slowest in three-and-a-half years or since April 2016’s 0.7%.

The day after, PSA reported the country’s trade-in-goods deficit narrowed to $3.12 billion in September from $4.02 billion in the same month last year amid an import decline of 10.5% outpacing that of exports, which contracted by 2.6%.

On Thursday, the government reported a third-quarter GDP growth of 6.2%, marking the fastest clip this year so far and picking up from the year ago’s six percent. This brought year-to-date GDP growth to 5.8%, closer to the lower end of the full-year goal but still a slower than last year’s 6.2%.

“Local interest rate benchmarks could again be steady to slightly lower, in view of the upcoming local monetary policy-setting meeting on [Thursday], especially if the BSP keeps its key policy rates unchanged, as consistent with earlier signals from local monetary authorities that there will be no more cuts in both local policy rates and RRR for the rest of 2019,” Mr. Ricafort said.

“However, in view of the 0.25-percentage-point [policy rate cut by the US Federal Reserve] on October 30, a possible cut in local policy rates cannot be completely ruled out, especially in the coming months.”

For the bond trader, local yields “might move with an upward bias” this week as the BSP is expected to hold its policy rates steady during its November meeting amid views that inflation has already bottomed out in October.

“Moreover, positive developments on the US-China trade talks are also seen to boost yields,” the bond trader added.

For ING Bank N.V.-Manila Senior Economist Nicholas Antonio T. Mapa: “Market players will be looking to the BSP meeting later next week for direction even if BSP Governor Benjamin E. Diokno signalled no more policy adjustments.”

“Possible comments from Governor Diokno on forward guidance could still give traders direction,” he said.