Debt yields rise as market turns cautious

YIELDS on government securities (GS) traded in the secondary market mostly climbed last week as the market remained cautious after the US government shut down following lawmakers’ failure to pass a short-term spending plan and before the release of key economic data.

GS yields, which move opposite to prices, climbed by an average of 3.29 basis points (bps) week on week, according to the PHP Bloomberg Valuation Service Reference Rates as of Oct. 3, published on the Philippine Dealing System’s website.

Rates at the short end of the curve were mixed. The 182- and 364-day Treasury bills (T-bills) increased by 1.3 bps (to 5.1765%) and 6.55 bps (5.3262%) week on week, respectively. Meanwhile, the 91-day T-bill fell by 2.01 bps to fetch 4.9153%.

At the belly, yields on the two- three-, four-, five- and seven-year Treasury bonds (T-bonds) rose by 2.87 bps (to 5.5765%), 2.51 bps (5.6936%), 2.15 bps (5.7865%), 2.19 bps (5.8611%), and 2.05 bps (5.9533%), respectively.

At the long end of the curve, the 20- and 25-year T-bonds climbed by 9.48 bps and 9.52 bps to yield 6.4397% and 6.4386%, respectively. On the other hand, the 10-year bonds inched down by 0.4 bp to 6.0223%.

GS volume traded reached P24.28 billion on Friday, significantly lower than the P34.48 billion recorded a week earlier.

“Short-dated bonds continued to strengthen [last] week, with T-bill auctions clearing 2-6 bps lower on average. The accommodative policy stance of the BSP (Bangko Sentral ng Pilipinas) has been a key driver of this resilience, allowing the front end of the curve to outperform. In contrast, longer-dated securities remain range-bound, reflecting a market still cautious to extend duration amid global uncertainties,” Alessandra P. Araullo, chief investment officer at ATRAM Trust Corp., said in a Viber message.

“The recent US government shutdown adds another layer of complexity. The disruption has delayed the release of critical economic data, creating an information gap for the Fed as it calibrates its policy rate path. Meanwhile, furloughed workers could temporarily distort labor market dynamics, adding noise to employment data. These developments may spill over into local fixed-income markets, reinforcing a cautious stance among investors who are mindful of global policy uncertainty and its potential impact on risk sentiment. Globally, the absence of timely US economic releases due to the shutdown complicates the read on Fed policy expectations.”

A bond trader likewise said that the delay in the release of key US data due to the shutdown is affecting the market’s expectations on the US Federal Reserve’s policy path.

“In absence of the weekly jobless claims and the official US labor data, financial markets relied on the latest private payrolls report from the ADP, which posted a net loss of jobs for September. This data firmed views on the continuing weakness of the US labor market and fueled dovish policy expectations, pulling yields lower,” the trader said in an e-mail.

A bid to end the government shutdown failed again in the Senate on Friday, Reuters reported. On the shutdown’s third day, US President Donald J. Trump ramped up pressure on Democrats to end the standoff and agree to a Republican plan that would restore government funding. But that failed in a 54-44 Senate vote, short of the chamber’s 60-vote standard, ensuring that the shutdown will last until at least Monday.

The shutdown, the 15th since 1981, has suspended scientific research, financial regulation, and a wide range of other activities. Pay has been suspended for roughly  two million federal workers, though troops, airport security screeners, and others deemed “essential” must still report to work.

On Friday, the government did not release its monthly unemployment report, leaving Wall Street guessing about the health of the world’s largest economy.

A Chicago Fed report that combined private and available public data estimated the September jobless rate was 4.3%, the same as in August and evidence that a feared rapid rise in unemployment had not yet begun.

But details of the report, along with other data, pointed to sluggishness in the labor market. The ADP National Employment report on Wednesday showed private payrolls decreased by 32,000 in September, boosting expectations that the Federal Reserve would cut interest rates twice more this year.

Traders see a 25-bp cut at the Fed’s October meeting as almost certain and are pricing in an 84% probability of an additional cut in December, according to the CME Group’s FedWatch Tool.

For this week, both Ms. Araullo and the trader said the market will take its lead from the September Philippine inflation data to be released on Tuesday (Oct. 7). A BusinessWorld poll of 12 analysts yielded a median estimate of 1.9% for September inflation, within the BSP’s 1.5-2.3% forecast for the month.

If realized, inflation would have accelerated from 1.5% in August but steadied from the 1.9% clip in September 2024. This would also be the fastest print in six months or since the 2.1% in February.

“Inflation stability remains the cornerstone of the local fixed income outlook. A benign print sustains the case for another BSP rate cut in the fourth quarter, further supporting the short end and gradually improving sentiment across the curve,” Ms. Araullo said.

“Domestic players might take cue from the Philippine inflation report for September, which might provide signals on the possible policy move of the BSP in this month’s meeting. Nevertheless, both local and foreign markets will remain contingent on the resolution of the US government shutdown and the eventual resumption of official economic data releases,” the trader said.

Meanwhile, the Monetary Board will meet to review policy on Thursday (Oct. 9).

The market is divided on the BSP’s next move, with 10 of 16 analysts in a separate BusinessWorld poll expecting the central bank to pause this week due to emerging inflation risks following three consecutive cuts that brought its policy rate to 5%.

The remaining six said the BSP is likely to deliver a fourth straight 25-bp cut to support the economy amid weaker growth prospects.

Ms. Araullo added that the government’s lighter borrowing program for this quarter that has fewer scheduled T-bond auctions could ease supply pressures, making market conditions more favorable.

“[This] week’s dual-tranche reissuance by the BTr (Bureau of the Treasury), targeting P35 billion, will be a critical test of market appetite for duration. The outcome could shape sentiment toward the mid- to long-end of the curve,” she said.

The BTr is looking to raise a combined P35 billion from an offering of dual-tenor T-bonds on Tuesday, or P15 billion from reissued seven-year bonds with a remaining life of two years and six months and P20 billion via reissued 10-year debt with a remaining life of nine years and six months. — Abigail Marie P. Yraola with Reuters