Yields on government debt flat on upbeat Fed minutes

By Christine J.S. Castañeda,
Senior Researcher

YIELDS on government securities (GS) traded in the secondary market were flat last week amid the upbeat tone of the Federal Open Market Committee (FOMC) meeting minutes, US employment report and domestic inflation data.

On average, GS yields — which move opposite to prices — climbed by 0.89 basis points (bps) last week, data from the Philippine Dealing & Exchange Corp. as of Jan. 5 showed.

“GS yields showed some upward bias [last] week primarily because of the upbeat tone of the FOMC minutes, which continued to support views of at most three US rate hikes in 2018,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (Landbank).

“The rise in yields, however, was almost offset by pull factors, including the uncertainty over the change in Fed (Federal Reserve) leadership and caution ahead of key US employment reports [last Friday],” he added.

A bond trader interviewed last Friday said: “On average, rates rose marginally but the yield curve steepened given traders’ concerns over domestic inflation and global events (US non-farm payroll).”

“Supply risk will also keep yields on the long-end elevated after the BTr (Bureau of the Treasury) released its [first quarter] borrowing schedule while the short-dates are pinned lower on defensive play,” the bond trader added.

The Fed maintained its forecast of three hikes this year in its meeting last month, Reuters reported. This indicates that the effects of the US tax reform will have a “modest, and possibly fleeting” effect.

Meanwhile, the Philippine Statistics Authority reported last week that prices of widely used goods recorded a 3.3% year-on-year increase in December, matching the previous month’s figure. For the entire 2017, inflation averaged 3.2% — landing within the 2%-4% target band given by the Bangko Sentral ng Pilipinas.

Also last week, the Bureau of Labor Statistics reported that US total non-farm employment grew by 148,000 in December. This was lower than the 190,000 estimate for the month and the upwardly revised 252,000 growth in November, Reuters reported.

At the secondary market on Thursday, in the short end of the curve, the yield on the 91-day Treasury bill (T-bill) increased by 73.59 bps to 3.1675%. The 182-, and 364-day papers went down 79.41 bps and 16.84 bps to yield 2.5134% and 2.8636%.

In the belly, yields on the two-, three-, and five-year Treasury bonds (T-bonds) lost 7.53 bps (3.9111%), 2.73 bps (4.2704%) and 1.82 bps (4.7255%). Meanwhile, the rates of the four- and seven-year T-bonds rose 0.71 bps (4.9282%) and 0.07 bps (5.3286%), respectively.

In the long end, the 10-, and 20-year T-bonds saw their yields increase by 9.60 bps and 33.23 bps to 5.7946% and 6.0361%.

For this week, Landbank’s Mr. Dumalagan said: “[Y]ields are expected to move with an upward bias, fuelled by likely firm US reports on producer prices, consumer prices and employment.”

“Yields might also rise as the market continues to digest the inflationary impact of the country’s tax reform,” he added.

Meanwhile, the bond trader said: “Market will continue to see a steeper curve with market players bracing for fresh supply in the long-end with the BTr auction for 10-year paper [this] week.”