Yields on gov’t securities inch up on US-China, Fed

By Mark T. Amoguis
Senior Researcher

YIELDS ON government securities (GS) went sideways last week as the trade spat between the United States and China eased ahead of the meeting between the two countries’ trade deputies.

GS yields, which move opposite to prices, went up by an average of 4.3 basis points (bp) week-on-week, according to the PHP Bloomberg Valuation Service Reference Rates as of Sept. 20 published on the Philippine Dealing System’s Web site.

“GS yields increased by an average of 4.3 basis points week on week, mostly due to US Treasuries reaching a multi-year high on less global economic noise, i.e. positive data from the US including the easing of tensions of the trade war between China and the United States,” Carlyn Therese X. Dulay, first vice-president and head of Wholesale Treasury Sales at Security Bank Corp, said in an e-mail interview.

“Market participants also took profit on their holdings as market seems to have fully priced in the remaining BSP (Bangko Sentral ng Pilipinas) moves for 2019,” she added.

“Local participants have started to take profits from the recent surge in bond prices in the previous weeks, which was further bolstered by the easing US-China trade tensions,” a bond trader said in a separate e-mail interview.

“The local bond market viewed the moves from the latest Fed meeting as relatively hawkish, due to the apparent divergence of opinion among various Fed officials regarding to the appropriate monetary action necessary for the US economy. This has contributed further to the climb in bond yields despite the recent Fed rate cut,” the bond trader said.

Officials from the world’s two largest economies met on Thursday to lay the groundwork for high-level talks in October that will determine whether the US and China are working toward a solution or headed for new and higher tit-for-tat tariffs.

A delegation of about 30 Chinese officials, led by Vice Finance Minister Liao Min, met counterparts at the US Trade Representative’s (USTR) office near the White House. Deputy USTR Jeffrey Gerrish led the US delegation.

To date, US has slapped 25% tariffs on some $250 billion of Chinese products, and China has retaliated with tariffs on $110 billion of US imports.

The US is scheduled to raise existing tariffs to 30% on Oct. 15, and tax another $156 billion worth of Chinese-made products in December, including $43 billion worth of cell phones.

Meanwhile, at the end of its two-day meeting last Sept. 18, the US Federal Reserve’s policy-setting Federal Open Market Committee cut benchmark interest rates for the second time this year by 25 bps to a range of 1.75% to 2% “to provide insurance against ongoing risks,” Fed Chair Jerome Powell said.

Bond yields increased across the board at the close of trading last Friday except for the 91- and 182-day Treasury bills, which dropped by 13.8 bps and 5.1 bps, respectively, to yield 3.207% and 3.462%.

The yield on the one-year paper meanwhile went up by 0.6 bp to 3.705%.

At the belly, the rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bond) climbed by 1.8 bps, 4.9 bps, 8.6 bps, 12.2 bps, and 13.5 bps, respectively, to 4.046%, 4.21%, 4.369%, 4.51%, and 4.688%.

The long end of the yield curve similarly rose, with the 10-, 20-, and 25-year notes increasing by 7.2 bps, 7.1 bps, and 10.5 bps, respectively, to 4.836%, 5.201%, and 5.201%.

For this week, all eyes are on the BSP’s Monetary Board’s policy meeting on Sept. 26 as the market anticipates a 25-bp cut.

BSP Governor Benjamin E. Diokno earlier said the central bank’s plan to cut rates again “won’t reach November.”

So far, the central bank has trimmed rates by a total of 50 bps this year — by 25 bps each last May 9 and Aug. 8 — to a range of 3.75% to 4.75%, partially dialing back the 175-bp cumulative hikes put in place last year to arrest multi-year high inflation.

“GS yields might move sideways, with a downward bias, as the BSP is expected cut policy rates by another 25 basis points this week,” the bond trader said.

“Likely softer US data on housing, durable goods, manufacturing, and services are also seen to drive yields lower, tempering the impact of likely upbeat US personal consumption expenditure inflation and positive developments on the US-China trade war,” the trader added.

For Ms. Dulay, she expects GS yield levels to remain range bound and to take its cue from Tuesday’s 20-year bond auction.

The Bureau of the Treasury will auction off on Tuesday reissued 20-year T-bonds worth P20 billion. The bonds have a remaining life of 19 years and four months and carry a coupon rate of 6.75%.

The government is set to borrow P230 billion from the domestic market this quarter through Treasury bills and T-bonds as it targets to raise P1.189 trillion this year from local and foreign sources to fund its budget deficit, which is expected to widen to as much as 3.2% of gross domestic product.