Yields on government debt climb on bets of BSP hike

EXPECTATIONS of faster economic growth in the US pushed yields on local government securities (GS) north last week, coupled with hawkish comments by the Bangko Sentral ng Pilipinas (BSP) governor that fuelled bets of another rate hike in August.
GS yields went up 12.96 basis points (bp) on average last week, data from the Philippine Dealing & Exchange Corp. as of July 27 showed.
“The increase in GS yields [last] week can be traced to three factors: indications from the BSP of another rate hike in August, expectations of upbeat US second-quarter GDP (gross domestic product) growth, and positive developments regarding the trade talks between the US and the European Union (EU),” said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (LANDBANK).
Ruben Carlo O. Asuncion, chief economist at the UnionBank of the Philippines, shared the same view on expectations of another BSP rate hike next month.
“There seem to be some consistency with yields going sideways but upward bias in the short-term. Market players are waiting and anticipating the ‘strong follow-through monetary adjustment’ communicated by the BSP Governor recently,” he said.
He added that the “clarity” on the state of further cuts in the reserve requirement ratio (RRR) “may have also played a role that signals a more contractionary or hawkish stance by the BSP consistent with how inflationary pressures should be addressed.”
In a speech last July 20, BSP Governor Nestor A. Espenilla, Jr. said the Monetary Board is considering a “strong follow-through” policy action for its upcoming Aug. 9 policy rate meeting to quell inflation expectations. This will follow the back-to-back rate increases in the BSP’s May and June policy reviews that jacked up key rates by a total of 50 bps.
Inflation averaged 4.3% in the first semester and peaked at 5.2% in June, leading the country’s economic managers to adjust their inflation outlook to 4-4.5% in 2018 from 2-4%.
However, some economists have flagged confusing signals by the BSP when it lowered the RRR to 18% from 20% through two equal one-point reductions in March and June, saying that this ran counter to the back-to-back 25 bps interest rate hikes.
The BSP chief told bank economists and other market watchers last Wednesday that the two cuts in the RRR introduced earlier this year should be enough for now, adding that the goal of achieving single digit RRR could be resumed next year when inflation “returns to target” based on their forecasts.
Meanwhile, on the external front, a survey conducted by Bloomberg among economists showed an expected average of 4.2% economic growth in the US on the back of narrowing trade deficit and robust consumer spending.
Furthermore, threats of an all-out trade war between the US and the EU showed signs of cooling off after US President Donald J. Trump and European Commission chief Jean-Claude Juncker agreed “to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.”
To recall, retaliatory tariffs have been imposed on US goods by China, the EU, Canada, and Mexico.
In the secondary market, the short-end of the curve saw yields on the 91- and 364-day Treasury bills (T-bill) climb by 2.21 bps (3.2773%) and 12.49 bps (4.8237%), respectively. On the other hand, the 182-day T-bill dropped 10.77 bps to fetch 4.2506%.
All tenors in the belly of the curve saw their yields go up. The five-year Treasury bonds (T-bond) led the way with a 44.03 bps increase to yield 6.1339% followed by the four-year T-bonds which rose by 25.71 bps to 5.9357%. The two-, three- and seven-year debt papers likewise increased by 16.55 bps (5.0427%), 9.30 bps (5.1127%) and 0.06 bp (6.3%).
In the long-end, the 10-year paper climbed 25.50 bps to fetch 6.65%. The 20-year T-bond also rose albeit slightly by 4.47 bps to yield 7.4518%.
Looking forward, UnionBank’s Mr. Asuncion expects yield movements to be sideways “with upward bias” due to the “expected hawkish decision” of the upcoming central bank meeting.
LANDBANK’s Mr. Dumalagan likewise shared the same outlook as the US Federal Reserve may yet again drop hawkish hints during its policy meeting on Aug. 2. Other factors that may push GS yields higher, he said, include possible tweaks to the Bank of Japan’s stimulus program, expectations of faster domestic inflation in July and bets of a BSP rate hike next month. — Vann Marlo M. Villegas