Yields on gov’t debt flat on Fed cut

YIELDS ON government securities (GS) ended flat after the US Federal Reserve cut its rates for the third time this year, as widely expected.

Debt yields, which move opposite to prices, went down by an average of 0.3 basis point week-on-week, according to the PHP Bloomberg Valuation Service Reference Rates as of Oct. 31 published on the Philippine Dealing System’s Web site.

“The local GS market propelled its way to modest gains week-on-week after the US Federal Reserve cut its rates for the third time this year,” Robinsons Bank Corp. peso sovereign debt trader Kevin S. Palma said.

“The market also took cue from BTr’s (Bureau of the Treasury’s) 7-year bond reissuance with its average yield printing at the lower-end of expectations,” he added.

Another bond trader said yields on local bonds went almost flat due to mixed market signals last week.

“Initially yields were lower on expectations of another 25-basis point policy rate cut from the US Federal Reserve, some movement prior to the Nov. 1 cut in the local reserve requirement, and the surprise announcement of another reserve cut in December,” the bond trader said in an e-mail interview last Thursday.

For his part, Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort said that local benchmark interest rates were mostly slightly lower week-on-week due to “already priced in” Fed rate cut.

“Nonetheless, any corresponding cut on key short-term interest rates by other major central banks around the world, including on local policy rates, remains… despite recent signals from the BSP (Bangko Sentral ng Pilipinas) about no more local policy rate cut for the rest of 2019 (after three quarter-point cuts since the start of 2019),” Mr. Ricafort said in an e-mail.

At the end of its two-day meeting last Wednesday, the US central bank slashed for the third time this year its benchmark rates by another 25 bps to a target range of 1.5% to 1.75%.

Meanwhile, the BTr raised P20 billion last Tuesday via reissued seven-year papers with a remaining life of six years and three months. These bonds fetched an average yield of 4.322%, lower by 18.1 bps from the 4.503% quoted during the Sept. 10 auction.

At the end of the trading last Thursday, the rates of the 91-, 182-, and 364-day Treasury bills climbed by 3 bps, 4.4 bps, and 0.7 bp, respectively, to 3.172%, 3.308%, and 3.615%.

The belly of the curve dipped as yields on the two-, three-, four-, five-, and seven-year notes decreased by 0.9 bp, 2.7 bps, 3.8 bps, 4.4 bps, and 4.9 bps, respectively, to 3.881%, 3.999%, 4.126%, 4.259%, and 4.479%.

The long end of the curve ended mixed as the rate of the 10-year debt dropped by 3.6 bps to 4.669%, while yields on 20- and 25-year papers inched up by 4.3 bps and 5 bps to 5.082% and 5.087%, respectively.

Local financial markets were closed on Nov. 1 in observance of All Saints’ Day.

For this week, market watchers said they expect local yields to continue their downward trajectory amid low inflation expectation tempered by likely upbeat third quarter gross domestic product (GDP) print.

“Yields might continue to fall next week mainly due to subdued expectations on the October local inflation reports this week… However, optimism ahead of the Philippine third-quarter GDP report could temper the decline in yields,” the bond trader said.

For his part, Mr. Palma sees bond yields may continue to trend sideways with downward bias this week amid benign inflation as well as a rebound in the third quarter GDP data.

“[L]ocal bond yields could still continue to ease slightly [this week] due to the increase in peso liquidity into the banking system/financial system with the effectivity of the RRR cut and as the financial markets are anticipating for favorable economic data on local inflation for the month of October 2019 and on local GDP growth data for 3Q 2019…,” Mr. Ricafort said. — Mark T. Amoguis