Debt yields decline on BSP easing bets

By Marissa Mae M. Ramos
Researcher

YIELDS ON government securities (GS) fell across-the-board last week following comments by Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno on the possibility of cutting key policy rates by more than 25 basis points (bps) to shield the economy from the negative economic impact of the coronavirus disease 2019 (COVID-19) outbreak.

Debt yields went down by an average of 5.8 bps week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of Feb. 28 published on the Philippine Dealing System’s website.

At the secondary market last Friday, yields were lower than week-ago levels across-the-board. In the short end of the yield curve, the 91-, 182-, and 364-day Treasury bills (T-bills) declined by 2.4 bps, 1.3 bp, and 2.3 bps to fetch 3.076%, 3.407%, and 3.846%, respectively.

At the belly of the curve, rates of the three-, four-, five-, and seven-year Treasury bonds (T-bonds) fell by 8 bps (3.863%), 10.5 bps (3.956%), 9.4 bps (4.037%), 6.7 bps (4.117%), and 3 bps (4.249%).

In the long end, yields on the 10-, 20-, and 25-year T-bonds went down by 4.3 bps (4.309%), 9.4 bps (4.763%), and 6.5 bps (4.864%).

“Philippine benchmark interest rates continued to ease week-on-week…after BSP Governor Diokno signaled possible further cuts on local policy rates and on banks’ RRR (reserve requirement ratio) if economic conditions worsen due to coronavirus concerns,” Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said in a mobile phone message.

Mr. Ricafort noted how benchmark bond yields in the US and other developed economies easing to record lows as investors sought safer investments amid the expected negative effects of COVID-19 on the global economy.

“Local interest rate benchmarks also eased amid lower global crude oil prices to among 14-month lows as the coronavirus concerns could also slow down demand for oil,” he added.

This view was shared by a bond trader, which attributed last week’s bond rally to “safe-haven buying” amid growing concerns over the spread of COVID-19 outside China.

South Korea reported 376 new confirmed coronavirus cases on Sunday, raising the country’s total number of infections to 3,526, the Korea Centers for Disease Control and Prevention (KCDC) said, Reuters reported.

Sunday’s new cases follow the 813 infections recorded on Saturday, the biggest daily jump in South Korea, which is grappling with the largest outbreak of the virus outside China. KCDC said it will update numbers later in the day.

Other cases have been reported in countries such as Italy, which has the highest incidence of the virus in Europe with 888 cases, while Brazil also confirmed its first case of infection last week.

Back home, BSP’s Mr. Diokno said last Thursday they will reassess how the virus could hit the Philippine economy as the outbreak worsens.

He told reporters that there would “definitely” be another 25-bp cut in key rates and said they were not ruling out a cut of as much as 50 or 75 bps. The central bank chief also said additional cuts in the RRR are on the table.

Mr. Diokno earlier said the central bank will likely trim rates by another 25 bps as early as the second quarter.

The BSP’s Monetary Board already moved to slash key interest rates by 25 bps on its Feb. 6 policy meeting after its 75-bp reduction last year which partially reversed the 175 bps worth of hikes in 2018 to stem strong inflationary pressures that time.

For this week, the bond trader said yields might continue to fall amid growing concerns over the COVID-19 outbreak and increasing expectations of more easing moves from the BSP and other central banks.

“Likely weaker US economic data releases may also weigh down on interest rates. However, this decline could be capped by likely stronger local inflation in February,” the bond trader said.

The Philippine Statistics Authority will report February inflation data on Thursday.

Likewise, another bond trader interviewed anticipates local GS yields to go down further to mirror the decline in US Treasuries as investors “flock to safer assets.”

For RCBC’s Mr. Ricafort: “Lower oil prices could ease inflationary pressures and support lower interest rates,” he said, adding that markets will also look to inflation results as a source of new leads for this week’s trading session.