Yields on gov’t debt track US Treasuries

YIELDS on government securities (GS) rose across the board last week amid higher US rates due to expectations of delayed policy easing by the US Federal Reserve.

GS yields, which move opposite to prices, went up by an average of 4.06 basis points (bps) week on week at the secondary market, based on the PHP Bloomberg Valuation Service Reference Rates as of Feb. 23 published on the Philippine Dealing System’s website.

At the short end, yields on the 91-, 182-, and 164-day Treasury bills (T-bills) went up by 5.22 bps (to 5.6226%), 4.48 bps (5.9045%), and 5.32 bps (6.1323%), respectively.

At the belly, the rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) increased by 7.29 bps (to 6.1316%), 4.6 bps (6.1638%), 2.8 bps (6.1946%), 2.51 bps (6.2228%), and 3.77 bps (6.2614%), respectively.

At the long end, the 10-, 20-, and 25-year papers climbed by 0.55 bp, 4.24 bps, and 3.86 bps to yield 6.2634%, 6.3995%, and 6.3994%, respectively.

GS volume traded stood at P17.97 billion on Friday, up from P4.24 billion on Feb. 16.

Local GS rates rose to track the increase in US Treasury yields, Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said in an e-mail.

“Local bond markets continue to take their cue from developments in the US Treasury market. With the Fed signaling it won’t be cutting rates soon, accompanied by some robust US economic data, local bonds have tracked their move,” Mr. Mapa said.

“Movement was mainly influenced by mostly elevated global yields following the reaction to higher price data from the US,” a bond trader likewise said in a Viber message.

The benchmark 10-year Treasury yield, which moves inversely to bond prices, hit 4.35% earlier last week, its highest level since late November, Reuters reported.

While optimism on earnings and the economy has helped stocks shrug off the climb in yields, this could change if inflation data keeps coming in stickier than expected, forcing the Fed to further delay rate cuts.

An inflation test arrives Thursday, with the release of January’s personal consumption expenditures (PCE) price index, which the Fed tracks for its inflation targets. On a monthly basis, the PCE index is expected to increase 0.3%, according to a Reuters poll of economists, up from a 0.2% rise the prior month.

The combination of strong growth and inflation not yet slowing to the Fed’s 2% target has led Fed officials to push back on rate cut expectations.

Fed funds futures show a 52.3% chance of a cut in June, with a 34.7% probability of no cut, a sharp reversal from bets on Feb. 1 of a 62% chance of a cut in March, according to CME Group’s FedWatch Tool.

The Bangko Sentral ng Pilipinas (BSP) is also unlikely to cut before the Fed does, which also affected local yield movements, Mr. Mapa said.

“They will likely mirror what the Fed will do and keep an outlook of elevated interest rates for the moment to maintain the interest rate differential and prevent the peso from depreciating,” the bond trader said.

GS yields rose due to the government’s retail Treasury bond (RTB) offering, Mr. Mapa added.

“Demand for other bonds may have also been impacted by the RTB issuance… Expect demand for the RTB to soak up market liquidity until settlement,” he said.

The government raised P584.86 billion from its offer of five-year retail bonds that ended on Friday, the Bureau of the Treasury (BTr) said in a statement over the weekend.

Of the total, P212.72 billion was awarded at the rate-setting auction for the RTBs held on Feb. 13.

An additional P372.14 billion was raised during the nine-day public offer period, with P128.69 billion of this being new money and P243.45 billion coming from the bond exchange component of the offering.

The BTr will issue the bonds on Feb. 28, Wednesday. The papers carry a coupon rate of 6.25%.

For this week, GS yields may continue to move sideways as the market waits for leads, the bond trader said.

“Traders will remain defensive for the moment and rallies will be short-lived as the market waits for a clear shift in the BSP’s outlook,” the trader said. — BTMG with Reuters