Yields on gov’t debt down on BSP bets

By Carmina Angelica V. Olano
Researcher

YIELDS ON government securities (GS) traded on the secondary market fell across the board on heightened expectations that the Bangko Sentral ng Pilipinas’ (BSP) will cut rates following the US Federal Reserve’s move to ease policy.

On average, GS yields went down by 16.3 basis points (bp) week on week, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates as of Aug. 2 published on the Philippine Dealing System’s website.

“The latest declines in PHP BVAL yields have been largely brought about by the latest 0.25-bp cut in key US short-term interest rate [by the Fed], expectations of further easing in local inflation rate…and possible cut in local policy rates on the next local monetary policy-setting meeting on August 8, 2019,” Rizal Commercial Banking Corp. economist Michael L. Ricafort said in an email.

In a separate phone interview, Jonathan L. Ravelas, chief market strategist at BDO Unibank, Inc. shared the same view: “Yields were down, first, on expectations the Fed’s [recent] rate cut will give the central bank more policy space. [Second], as inflation decelerates, the BSP will tend to cut rates.”

Mr. Ravelas also noted that if other macroeconomic conditions — like oil prices and the peso — are good, then “there could be another cut this August 8.”

The BSP’s Monetary Board meets on Aug. 8 for its fifth policy review for 2019. The central bank has signaled that further cuts in benchmark interest rates are on the table after it reduced borrowing costs by 25 bps in May. This was its first rate cut since a cumulative 175-bp hike last year in the face of multi-year high monthly inflation rates.

The BSP’s Department of Economic Research said last week that July inflation likely settled within the 2.0-2.8% range, saying lower rice and domestic LPG costs, the downward adjustment in electricity rates and the recent peso appreciation likely tempered price pressures last month.

The floor of BSP’s estimate would be the slowest in more than two-and-a-half years or since October 2016’s 1.8%, while the ceiling compares with June’s 2.7% and the 5.7% clocked in July last year.

Meanwhile, last Wednesday, the Fed trimmed its policy rates by 25 bps for the first time in a decade. However, Fed chair Jerome Powell said during the two-day meeting of the central bank’s Federal Open Market Committee on July 30-31 that the latest cut was only done to adjust to economic conditions.

Treasury bills (T-bill) eased across the board, led by the 364-day debt papers which yielded 4.15%, down 38.3 bps from the week-ago level. The 91-day and 182-day T-bills went down 7.5 bps and 7 bps to 3.82% and 4.05%, respectively.

Bonds at the belly of the curve likewise fell. The two-, three- and four Treasury bonds (T-bond) were quoted at 4.31%, 4.42% and 4.48%, down 19.6 bps, 15.9 bps and 16.6 bps, respectively. Similarly, the five-, seven-, and 10-year papers yielded 4.5%, 4.53%, and 4.58%, which were 19.6 bps, 22.3 bps and 17.9 bps lower week-on-week.

Yields on longer-term debt papers also declined, as the 20- and 25-year T-bonds were quoted at 4.91%, down 7 bps and 7.1 bps, respectively, from a week ago.

For this week, analysts expect yields to ease further.

BDO’s Mr. Ravelas expects yields to move sideways to down ahead of significant data and developments to be released this week.

“The market expects monetary policy to be cut, the country’s gross domestic product (GDP) will improve, and inflation will be lower,” he said.

For RCBC’s Mr. Ricafort, “Philippine interest rate benchmarks…could still continue their easing streak in the coming weeks…especially if the latest inflation data continue to ease further, if the latest GDP growth data for 2Q 2019…remained relatively softer…, and if the local policy rates are cut on the next monetary policy-setting meeting…”

The Philippine Statistics Authority will report July inflation data on Aug. 6 and second quarter GDP data on Aug. 8.