Yields on gov’t securities climb on inflation data

YIELDS ON government securities (GS) went up last week as market players took profit ahead of last Friday’s release of slower-than-expected August inflation data.

Bond yields, which move opposite to prices, climbed by an average of 6.3 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates published as of Sept. 4 on the Philippine Dealing System’s website.

At the secondary market last Friday, yields of the 91- and 182-day Treasury bills (T-bills) inched up by 0.6 bp and 2.1 bps, respectively, to 1.209% and 1.461%. On the other hand, the 364-day debt paper dipped by 0.8 bp to 1.807%.

Rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) climbed by 4.5 bps (2.163%), 7 bps (2.354%), 8.8 bps (2.514%), 9.3 bps (2.637%), and 8 bps (2.784%).

At the long end, the 10-, 20-, and 25-year tenors increased by 7.9 bps, 15.2 bps, and 6.5 bps to fetch 2.876%, 3.672%, and 3.695%.

“Local yields generally increased during the week amid initial market bets of a continued uptick in local inflation for August 2020 and after the local unemployment rate was recorded at 10% for the third quarter of 2020, better from the record-high level in the previous quarter,” a bond trader said in an e-mail.

First Metro Asset Management, Inc. (FAMI) saw the uptick as a market reaction to the “less dovish rhetoric from the BSP (Bangko Sentral ng Pilipinas) and hefty domestic borrowings of the government slated for 2021.”

“T-bills remained to be of demand as investors park in very short-term bills amid rising yield environment. Meanwhile, players continue to trim bond holdings as local yield curve track the steepening move that has been seen in global bond yields on the lack of fresh leads,” FAMI said in a separate e-mail,

The latest Budget of Expenditures and Sources of Financing report released on Aug. 26 showed the government’s outstanding debt is expected to rise to P10.16 trillion by the end of 2020 from P7.731 trillion in 2019.

Additional borrowings next year are expected to total P3.48 trillion with principal repayments of P1.72 trillion. By the end of 2021, the outstanding debt is projected at P11.982 trillion.

Meanwhile, the Philippine Statistics Authority’s (PSA) latest inflation report on Friday showed headline inflation easing to a three-month low 2.4% in August. This was slower than both the 2.7% logged in July, and the 1.7% recorded in August 2019.

The August inflation result fell below the 2.8% median estimate in a BusinessWorld poll as well as settling at the low-end of the BSP’s 2.5%-3.3% forecast range for the month.

Year to date, the country’s headline inflation rate averaged at 2.5%, a tad slower than the BSP’s forecast of 2.6% for 2020.

On Thursday, the PSA also reported an unemployment rate of 10% in July, easing from the record-high 17.7% in April, albeit still higher than the 5.4% jobless rate in July 2019.

“Given that August CPI (consumer price index) came out better than expectations, yields on the front-end to five-year securities seems to have stabilized. Our medium-term view is for a steeper curve as dealers and end-users alike sell backend bonds and shift to the front,” FAMI said.

The firm also said BSP’s bond-buying program would likely temper the expected uptick, which is caused by the “overall defensive tone” as investors trim risk positions, in the near term.

“FAMI holds on to its view that monetary policy will remain accommodative as the globe face and recover from the pandemic,” it said.

For the bond trader: “[B]enchmark tenors are expected to decline as August inflation report came in way below than expected. This weak inflation reading might spur market bets of a possible rate cut from the BSP on the Oct. 1 policy meeting before the release of the September inflation data.”

The central bank has cut benchmark rates by 175 bps this year, putting the overnight reverse repurchase, lending and deposit rates at record lows of 2.25%, 2.75% and 1.75%, respectively.