Yields on gov’t securities drop as central banks move to tighten

YIELDS on government securities dropped amid noise from developed countries’ central banks, mixed United States (US) key economic data and a weakening peso, tracking global rate movements.

Bond yields, which move opposite to prices, fell by an average of 14.06 basis points (bps) week on week, data from the Philippine Dealing & Exchange Corp. as of July 21 showed.

“There has been a lot happening among developed countries’ central banks this week,” Ruben Carlo O. Asuncion, chief economist of the Union Bank of the Philippines (UnionBank), said on Friday, noting in particular the European Central Bank (ECB), the Bank of Japan (BoJ), “and US Federal Reserve’s dovish stance becoming more obvious with US inflation softening.”

Reuters reported global investors are betting on a slower tightening from the Fed after softer US inflation trimmed some of the policy makers’ views regarding the need to aggressively hike rates.

US Treasury yields fell on Friday in step with European yields as the euro hit a near two-year high against dollar, raising doubts whether the ECB would scale back its bond purchases later in 2017.

The ECB stuck to its ultra-loose policy stance at its meeting last week as Europe’s inflation remained below 2%, but currency traders perceived ECB President Mario Draghi’s comments at his news conference as supportive to build bullish bets on the euro.

Meanwhile, the BoJ kept monetary policy steady and pushed back again the timing for achieving its 2% inflation target on Thursday, reinforcing expectations it will lag well behind major global central banks in dialling back its massive stimulus program. The bank maintained the 0.1% interest it charges on a portion of excess reserves that financial institutions park at the central bank.

“Local government securities yields moved sideways to slightly lower [last] week, in line with global yield movement as market participants anticipate the US Fed to hold rates steady at the next meeting on July 26-27,” Carlyn Therese X. Dulay, vice-president and head of institutional sales at Security Bank Corp., said in an e-mail.

“The slight downward movement was driven mostly by weak consumer price index (CPI), retail sales and new health care bill in the US,” added Ms. Dulay. “Dovish remarks from the ECB and a weakening peso later caused bonds to move sideways towards the end of the week.”

According to Reuters, the US Labor Department said the unchanged reading in its CPI came as the cost of gasoline and mobile phone services declined further. The CPI dropped 0.1% in May and the lack of a rebound in June could trouble Fed officials who have largely viewed the recent moderation in price pressures as transitory.

A second report from the Commerce Department showed retail sales fell 0.2% last month, weighed down by declines in receipts at service stations, clothing stores and supermarkets.

Back home, the peso climbed further against the dollar on Friday due to the ECB’s hawkish tone at the close of its policy meeting. The local unit closed at P50.71 against the dollar to end the week, gaining 17 centavos from its previous finish of P50.88. However, week on week, the peso dropped six centavos from its P50.65-a-dollar close last July 14.

In the secondary market, rates on government debt papers were mixed. In the short end of the yield curve, the 91- and 182-day Treasury bills (T-bills) rallied, with rates going down by 03.53 basis points (bps) (2.7911%) and 16.05 bps (2.8324%). The 364-day T-bills saw its yield go up 14.61 bps to 3.016%.

In the belly, yields on the two-, three-, four-, and five-year Treasury bonds (T-bonds) went down respectively by 9.82 bps (3.6804%), 6.97 bps (3.8816%), 43.77 bps (4.0641%) and 8.71 bps (4.122%), respectively. The seven-year T-bonds yields go up by 0.79 bps to fetch 4.8661%.

In the long end, the 10- and 20-year T-bonds rallied, with their rates going down by 36.04 bps (4.6896%) and 31.06 bps (5.1626%), respectively.

Looking forward, Ms. Dulay of Security Bank expect yields to be range-bound this week ahead of Tuesday’s reissuance of the 20-year T-bonds, with bids by banks expected to come in at 5.15-5.25%. Other drivers would be the US GDP (gross domestic product) data and the Federal Open Market Committee meeting.

Mr. Asuncion of UnionBank sees more of the same for this week’s trading. “Until it is a lot clearer what the US Fed will do, yields will be softer.” — Lourdes O. Pilar with Reuters