Gov’t securities rally on expectations of BSP cut

LAST WEEK saw yields on government securities (GS) move south almost across-the-board, with investors taking their cue from a statement by Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno saying the central bank may consider cutting rates by about 50 basis points (bps) next year.

At the secondary market, GS debt yields dropped by an average of 5.3 bps, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of Dec. 13 published on the Philippine Dealing System’s website.

At the short end of the yield curve, only the 364-day Treasury bills (T-bills) saw a decline in yields, albeit at a flat 0.1 bp to 3.471%. On the other hand, rates of the 91- and 182-day T-bills went up by 7.5 bps (3.254%) and 0.2 bp (3.347%), respectively.

At the belly, rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) saw declines, giving up 6.4 bps (3.725%), 6.5 bps (3.857%), 6.9 bps (3.998%), 7.5 bps (4.143%), and 9.2 bps (4.381%).

Debt papers at the long end of the curve likewise rallied. The yield on the 10-year debt paper went down 14.8 bps (4.536%), followed by the 25-year T-bond’s 7.8-bp dip (5.158%) and the 20-year’s 6.6 bps (5.165%).

“The lower yields since the start of [last] week were because of two factors: one, the anticipation on the year-end rally… [with investors] buying ahead of next year; and second, the BSP Governor announcing an additional 50-bp cut next year,” said Security Bank Corp.’s Chief Investment Officer for Trust and Asset Management Group Noel S. Reyes in a phone interview.

A bond trader also attributed the yield movements to investors mainly pricing in a possible rate cut: “[BSP Governor] Diokno mentioned that there is probably going to be a total of 50-bp cut for 2020, so I think markets are factoring in that rate cut possibility.”

In an interview with Bloomberg TV on Friday, Mr. Diokno said the BSP will be “considering” a 50-bp cut in 2020. This was the day after the Monetary Board’s decision to hold key interest rates on its eighth and final meeting in 2019.

If realized, a total of 125 bps will have been dialed back by 2020 from the BSP’s 175-bp rate hike in 2018 in the face of surging inflation that averaged a near-decade-high of 5.2% that year.

Benchmark rates for the overnight reverse repurchase facility, as well as overnight deposit and lending, currently stand at four percent, 3.5%, and 4.5%, respectively, following 75 bps worth of cuts this year.

Prior to Mr. Diokno’s statement, analysts were already expecting the BSP to resume monetary policy easing in the first quarter of 2020.

“I think we will continue to be in a downward trend in terms of yields…,” said Security Bank’s Mr. Reyes moving forward. — E.C. Aruta