Yields on government debt inch down on surprise cut

YIELDS ON government securities (GS) edged lower last week after the central bank’s surprise move to bring down borrowing costs to fresh record lows amid a sluggish economic backdrop.

Debt yields, which move opposite to prices, went down by an average of 3.9 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Nov. 20 published on the Philippine Dealing System’s website.

“Local yields closed almost unchanged for the week after initially rising amid market expectations that the Bangko Sentral ng Pilipinas (BSP) will keep its policy rates unchanged during its policy meeting [last] week,” a bond trader said in an e-mail interview.

“However, yields substantially declined on Friday following the unexpected 25-bp BSP policy rate cut which was announced Thursday afternoon,” the bond trader said.

First Metro Asset Management, Inc. (FAMI) shared a similar view, saying bond yields were “generally sideways” last week with some pullback in tenors in the belly to the long end before the rate cut.

The central bank’s Monetary Board unexpectedly slashed benchmark rates by 25 bps on Thursday — its fifth cut this year — to new record lows to prop up an economy battered by recent typhoons and muted sentiment amid the coronavirus pandemic. This brought the rates on the BSP’s overnight reverse repurchase, lending, and deposit facilities to 2%, 2.5%, and 1.5%.

The central bank has trimmed key rates by a total of 200 bps this year.

The central bank also adjusted upwards its inflation forecast for this year to 2.4% from the 2.3% it gave last month.

Meanwhile, the BSP sees inflation at 2.7% (from 2.8%) and 2.9% (from 3%), respectively, in 2021 and 2022 as domestic activity remains sluggish and amid a strong peso and lower global crude oil prices.

But market reaction was relatively muted even as the policy cut was largely viewed as a surprise, ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro said.

“Buying interest surged as expected, but it was focused on the belly (five- to seven-year bonds) of the curve with a rally of 10-12 bps. Interest on longer-tenor securities remained thin with bids adjusting just marginally lower,” he said.

At the secondary market last Friday, yields were lower than week-ago levels except for 20- and 25-year papers, which rose by 6.4 bps and 7.6 bps, respectively, to 4.065% and 4.08%.

Yields on the 91-, 182-, and 364-day Treasury bills (T-bills) declined by 2 bps, 4.3 bps, and 1 bp to 1.084%, 1.429%, and 1.758%, respectively.

At the belly of the curve, rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) also fell by 9.6 bps (to 1.953%), 9.2 bps (2.223%), 8.5 bps (2.463%), 7.5 bps (2.663%), and 6.8 bps (2.875%), respectively.

The 10-year T-bond likewise slid by 7.7 bps to fetch a rate of 2.934%.

The bond trader said GS yields may continue to decline this week following the BSP’s rate cut and market expectations of dovish guidance from the minutes of the US Federal Reserve’s latest policy meeting.

“We expect the downward bias for yields to continue going into [this] week,” FAMI said. “Current yield levels favor the government’s borrowing cost which is crucial to its deficit funding and budget disbursements. Near-term trading might also factor in the possibility of a reserve requirement ratio cut.”

For his part, Mr. Liboro said despite the BSP rate cut, he expects yields to increase in the short term.

“We expect some more profit taking on the back of policy moves and yields to continue their gradual adjustment higher towards yearend,” he said. — Jobo E. Hernandez