Gov’t debt yields drop on inflation

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Yield Tracker

YIELD 011419

By Mark T. Amoguis

YIELDS ON government securities dropped last week as market players reacted further to easing inflation expectations as well as the dovish tone of the US Federal Reserve meeting’s minutes.

Bond yields, which move opposite to prices, slipped by an average of 20.5 basis points (bp) week-on-week, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates posted on the Philippine Dealing System’s Web site on Jan. 11.

“The latest decline in PHP BVAL yields has been largely due to the continuing positive effects of the easing inflation trend and expectations of further decline in inflation that would fundamentally lead to some downward adjustments on local interest rates,” Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), said in an e-mail last week.

On the external front, Mr. Ricafort said: “More dovish statements/reiterations from Federal Reserve Chairman Jerome Powell, the Federal Reserve minutes, and from other Fed officials that suggest a possible pause in Fed rate hikes have also supported relatively lower US government bond yields.”


“The latest $1.5 billion 10-year RoP (Republic of the Philippines) bond issuance partly reduced the need to borrow from the domestic market, thereby partly leading to lower local interest rates/PHP BVAL yields [last] week,” he added.

A bond trader interviewed on Friday agreed, saying the market was still reacting to lower inflation figures for December.

“The FOMC (Federal Open Market Committee) minutes show a more dovish Fed,” the trader added.

Latest Philippine Statistics Authority data showed that headline inflation in December rose by 5.1% annually, easing from 6% in November but faster than 2.9% in the same month the previous year. This was the slowest pace since May’s 4.6% print.

This brought inflation to average 5.2% in 2018, beyond the Bangko Sentral ng Pilipinas’ 2-4% target range and the highest since an 8.2% clip in 2008.

Meanwhile, minutes of the December meeting of the US Federal Reserve’s policy-setting body FOMC released last week revealed policy makers wanting greater clarity on the state of the economy before going through the central bank’s rate hikes any further.

On the other hand, last Tuesday, the Philippines returned to the international debt market after it sold $1.5 billion in 10-year offshore dollar bonds priced 110 bps above the benchmark US treasuries and tighter than an initial 130-bp guidance.

At the close of trading on Friday, the short end of the curve saw yields on the three-, six-month, and one-year debt drop by 5.5 bps, 10.1 bps, and 12.9 bps, respectively, to close at 5.798%, 6.436%, and 6.644%.

The belly similarly dipped as two-, three-, four-, five-, and seven-year bonds saw their rates decrease by 22.8 bps, 29.9 bps, 31.9 bps, 32 bps, and 29.8 bps, respectively, to 6.513%, 6.504%, 6.494%, 6.498%, and 6.572%.

At the long end, the 20- and 25-year papers declined by 12.9 bps and 6.9 bps, fetching 7.245% and 7.303%.

For this week, “we may see a sideways with downward bias movement of yields. Market players are taking profits due to the big drop in yields,” the bond trader said.

RCBC’s Mr. Ricafort concurred: “For [this] week, the declining trend in most PHP BVAL yields could still continue, provided that the peso exchange rate continues its gradual appreciating trend vs. the US dollar (among the best in eight months recently), as this fundamentally leads to further easing of the inflation rate, amid continued foreign portfolio/hot money inflows seen since the start of 2019.”