Yield Tracker

YIELDS ON government securities (GS) moved sideways last week amid renewed geopolitical tensions in the Middle East as well as market anticipation of local inflation data and further rate cuts from the central bank.

At the secondary market, GS debt yields dipped by an average of 0.3 basis point (bp) on a week-on-week basis, according to data on the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website as of Jan. 3.

“Local yields generally declined over the week due to safe-haven demand over possible geopolitical news during the holidays, including the re-escalation of tensions in the Middle East [last] Friday,” a bond trader said in an e-mail interview.

“Yields also fell on expectations of further 50-basis-point policy rate cut from the BSP (Bangko Sentral ng Pilipinas) this year,” the bond trader added.

For ATRAM Trust Corp. Fixed Income Head Jose Miguel B. Liboro: “Yields on the longer-tenor securities dropped the most as investor sentiment firmed up amid benign inflation expectations and speculation that global bond yields would continue to adjust lower on flight-to-quality sentiment due to the recent escalation of US-Iran hostilities.”

Mr. Liboro also noted that the upcoming inflation print will continue to “trend higher” but is still expected to stay lower than two percent.

BSP Governor Benjamin E. Diokno said last month that the central bank will continue to reduce benchmark interest rates this year by at least 50 bps after successive hikes in 2018 to rein in multi-year high headline inflation.

Meanwhile, the BSP Department of Economic Research forecast inflation for December to range from 1.8% to 2.6% due to higher electricity rates and oil prices.

On the other hand, Reuters reported last week that Iranian major general Qassem Soleimani died at the Baghdad airport on a US airstrike ordered by US President Donald J. Trump to discourage future Iranian attacks.

“US military has taken decisive defensive action to protect US personnel abroad by killing Qassem Soleimani,” the Pentagon was quoted in the report.

Prime Minister Adel Abdul Mahdi of Iraq also said in a statement that legislation is necessary to protect Iraq’s sovereignty after the strike which was a violation of the conditions that kept US military forces in their country.

Another bond trader said in a phone message: “[L]ocal players await for the first auction of the year amid borrowing concerns given the aggressive infrastructure plan of the government.”

With a P4.1-trillion national budget for 2020, the government would also need to borrow from local and foreign markets to finance all of its programs. A memorandum released before Christmas showed that the government plans to borrow P420 billion in the first quarter of 2020 from the local market through short- and long-term debt papers.

The borrowing plan for this quarter is 17% higher than the P360 billion programmed in the first quarter of 2019.

At the secondary market, rates of the 91- and 182-day Treasury bills (T-bills) fell by 1.4 bp (to 3.190%) and 1.7 bp (3.356%), respectively. The 364-day T-bills went up by 1.5 bp, yielding 3.43%.

At the belly of the curve, yields on the two-, three-, and four-year Treasury bonds (T-bonds) also rose by 3.4 bps (3.772%), 2.6 bps (3.856%), and 1.2 bp (3.952%), respectively. On the other hand, the five- and seven-year T-bonds saw their rates decrease by 0.5 bp (4.056%) and 2.1 bps (4.258%).

Debt papers at the long end of the curve declined. Yields on the 10-, 20- and 25-year debt dropped 0.6 bp (4.455%), 2.3 bps (5.136%) and 3.6 bps (5.182%), respectively.

For the coming weeks, Mr. Liboro expects yields to stay within range due to a slew of factors: if the inflation print is within expectations of not more than two percent, continued investor appetite for longer tenor securities, and the easing of US Treasury yields.

On the other hand, the bond trader said “[y]ields could rebound higher next week amid likely stronger inflation readings from the Philippines, China, and the Eurozone which might reduce expectations of further monetary policy easing from various central banks.”

“However, the increase in yields might be tempered by potentially softer US labor reports for December 2019,” the bond trader added.

The other bond trader sees that yield curve will “flatten” this week given the new supply of shorter tenor bonds and higher inflation expectations.

“Lower US Treasury rates for the week should also influence government yields to trek lower. But uncertainty of new supply for the three-year auction next week should pressure government yields higher,” the second trader said. — E. C. Aruta, Jr.