Yield Tracker

By Christine J.S. Castañeda
Senior Researcher

YIELDS ON government securities (GS) ended mixed last week on dovish comments from Federal Reserve Chairman Jerome Powell and in reaction to easing inflation at home.

On average, debt yields — which move opposite to prices — went down by two basis points (bp) week-on-week, according to the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of July 12 published on the Philippine Dealing System’s website.

“Rates were actually mixed with short end rates dipping in reaction to slowing inflation and dovish comments from Bangko Sentral ng Pilipinas (BSP) Governor [Benjamin E.] Diokno while longer-dated bonds saw yields rise to track the movement of US Treasury yields,” Nicholas Antonio T. Mapa, senior economist at ING Bank N.V.-Manila branch, said in an email.

“Rates were generally inching lower ahead of the testimony of Fed Chair Powell but tiptoed higher even after his dovish confirmation of a possible Fed rate cut in the near-term as investors started to worry about the pace of global growth,” he added.

In a separate email, a bond trader said: “[S]hort-term end of the yield curve dropped significantly for the week as market expectations of a July Fed policy rate cut were solidified after Federal Reserve Chairman Jerome Powell reinforced dovish guidance in his monetary policy testimony before the US Congress and similar dovish indications following the release of the June 2019 Fed policy minutes.”

“On the long-term end, yields were broadly higher on increased risk appetite from investors opting to divert towards riskier assets following the recent rally in equities,” the bond trader added.

Preliminary data from the Philippine Statistics Authority showed headline inflation at 2.7% last month, down from 3.2% in May and 5.2% in June 2018. The latest result was also the slowest since the 2.6% logged in August 2017.

The June result fell within the BSP’s 2.2%-3.0% estimate for the month and was lower than the 2.9% median in BusinessWorld’s poll of 12 economists.

The latest reading brought year-to-date inflation to 3.4%, past the midpoint of the BSP’s 2-4% target range though still above the 2.9% full-year forecast average.

Meanwhile, according to BSP’s Mr. Diokno, the central bank is likely to cut policy rates in the second half before moving to reduce the reserve requirement ratio.

On the other hand, in his congressional testimony on Wednesday, Mr. Powell hinted at a Fed rate cut this month, citing trade tensions and concerns on global growth weighing on the economy.

At the close of trading last Friday, the 91-day Treasury bill dropped 20.6 bps to yield 4.123%. Rates of the 182- and 364-day debt papers likewise declined 18.2 bps and 3.6 bps to 4.362% and 4.815%, respectively.

Rates of the two-, three- and four-year Treasury bonds (T-bond) rose 2.4 bps (4.854%), 2.2 bps (4.876%) and 2.2 bps (4.913%). Yields on the five- and seven-year debt papers likewise increased by 2.4 bps (4.953%) and 2.5 bps (5.003%).

Yields on the 10-, 20- and 25-year notes also rose by 1.9 bps, 3.3 bps and 3.6 bps, respectively, to end 5.019%, 5.090% and 5.091%.

For this week, Mr. Mapa said: “Market will continue to take its cue from global developments with investors also looking forward to the seven-year T-bond auction [this week].

For the bond trader: “Local yields might move with a downward bias [this week] amid the lingering impact of dovish guidance from US Fed Chair Powell and from the minutes of the June 2019 FOMC (Federal Open Market Committee) meeting.”

“Yields might also decline, as weak economic data from key economies abroad might prompt investors to hold on to safer securities like government bonds,” the bond trader added.