Yield Tracker

By Marissa Mae M. Ramos

YIELDS ON government securities (GS) continued to be flat last week amid mixed developments in the US-China trade talks and the statement of the Philippine central bank chief hinting on the possibility of another rate cut this year.

At the secondary market, debt yields rose on average by 0.3 basis point (bp) week-on-week, according to PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website on Nov. 29.

“Local yields ended almost flat for the week due to mixed developments in the US-China trade discussions,” a bond trader said in an e-mail.

“Yields were initially higher as US President Donald J. Trump remarked that a first-phase trade deal with China is already ‘very close’ to completion… However, towards the end of the week, trade fears were revived after he signed the Hong Kong [Human Rights and] Democracy Act which is widely seen to delay the first-phase trade agreement,” the bond trader added.

In a phone interview, Security Bank Corp. Vice- President and Head of Fixed Income Dino Angelo C. Aquino attributed the flat GS yields to “lack of fresh leads…mainly following the auction result last Tuesday of the 20-year Treasury bonds…”

Mr. Aquino noted that the bonds fetched 5.341% on average, which is higher than market expectations of 5.25%.

“Another reason could be the statement of Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno of a possibility of an interest rate cut this year that the market didn’t price in earlier,” he added.

The Bureau of the Treasury last week awarded just P12.271 billion of the P20 billion programmed for the reissued 20-year Treasury bonds (T-bond) even as the tenor attracted P28 billion worth of bids.

The debt papers fetched an average of 5.341%, 32.6 bps higher from the 5.015% quoted when the tenor was last awarded in July. At the Sept. 24 auction, the Treasury rejected bids worth P30.7 billion for this tenor as the market asked for higher rates.

Following the auction, Deputy Treasurer Sharon P. Almanza told reporters there is not much appetite for longer tenors as the market prefers shorter-dated securities following the BSP chief’s remarks on the possibility of another rate cut within the year.

Earlier last month, Mr. Diokno told reporters that a 25-bp cut will not be off the table on the last policy meeting of the Monetary Board (MB) this year, which is scheduled on Dec. 12.

The central bank chief said policy decisions will always remain data-dependent and that the MB will not make any “drastic” changes to avoid being misinterpreted by the market as “desperate.”

Mr. Diokno’s statement came after the MB decided to pause cutting rates in its Nov. 14 policy meeting to observe possible adjustments from previous rate reductions.

At the external front, Mr. Trump confirmed the progress of the first phase of the trade deal between US and China after key negotiators agreed through a phone call of further finalization on certain issues in the trade agreement.

Reuters reported that same week also saw Mr. Trump signing a legislation intended to help Hong Kong maintain its autonomy from Beijing to justify favorable trading terms with the US to which China’s Foreign Ministry cautioned of “firm counter measures.”

At the secondary market last Friday, the 91- and 182-day Treasury bills (T-bills) inched up by 0.4 bp and 3.3 bps, respectively, to fetch 3.178% and 3.371%. On the other hand, the 364-day debt paper dropped 0.8 bp, yielding 3.510%.

At the belly of the yield curve, the rates on the two-, three-, four-, and five-year T-bonds declined by 5.5 bps (3.791%), 3.9 bps (3.941%), 1.9 bps (4.099%), and 0.2 bp (4.256%). Meanwhile, the seven-year paper saw its yield go up by 1.5 bps to 4.515%.

Yields on the 10-, 20-, and 25-year T-bonds climbed by 2.1 bps, 4.9 bps, and 3.9 bps, respectively, to yield 4.741%, 5.283%, and 5.298%.

For this week, Security Bank’s Mr. Aquino expects the inflation result on Thursday to be one of the market catalysts.

“We expect yields to remain range bound with a downward bias as inflation is expected to remain low,” he said, noting that the last month’s headline figure is likely to stay below two percent.

Mr. Aquino also expects the downward bias to continue until the first quarter of 2020 as the BSP continues “easing requirements by 100 to 200 bps next year” in line with Mr. Diokno’s goal of reducing the reserve requirement ratio for big banks before the end of his term in 2023.

Meanwhile, the bond trader said local yields “might move with an upward bias” this week amid bets of faster domestic inflation in November as well as the “likely upbeat” US economic data on manufacturing and labor.

“The increase in yields, however, might be capped by bets of another rate cut from the BSP [this month] and from lingering uncertainty on the US-China trade talks,” the bond trader added.