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Yields on government debt decline across the board

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GOVERNMENT DEBT YIELDS went down across the board due to market anticipation of rate cuts from the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve amid the release of key macroeconomic data in the coming weeks.

Yields on government securities, which move opposite to prices, declined 18.1 basis points (bp) on average on a week-on-week basis, according to PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s Web site last July 26.

“The recent move has still been mainly due to local factors — given market expectations of inflation continuing to move lower and the likelihood of BSP action at their upcoming policy meeting in August,” ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro said in an e-mail.

“Speculation that the US Federal Reserve are poised to cut rates at their own policy meeting at the end of the month has also contributed to the bullish sentiment in the market,” Mr. Liboro added.

A bond trader said in an email that “the likelihood of a sub-2% headline inflation for the third quarter of this year” further fueled market expectations of a BSP rate cut while a “weaker second-quarter US gross domestic product (GDP) report” strengthened bets of a 25-bp Fed policy rate cut.

In a BSP report published earlier this month, headline inflation slowed to three percent in the second quarter from a 3.8% recorded in the January to March period. Last quarter’s inflation figure stood at the midpoint of the BSP’s target band for the year.




Policy rates were kept unchanged at the central bank’s June policy meeting to assess the impact of the previous rate adjustments. The BSP also revised downward its inflation forecast for the year to 2.7% from the 2.9% in May.

The BSP’s Monetary Board is set to review policy anew next week. GDP data for the second quarter will be released the same day, while July’s inflation data will be released on Aug. 6.

On the external front, the Fed is likely to cut rates at its two-day meeting this week after earlier sentiments of Fed chair Jerome Powell that the central bank will “act as appropriate” from possible headwinds to the US economy.

“Global markets were largely anchored to the dovish comments from the European Central Bank policy meeting [last] week, which were otherwise expected by global markets as weaker economic data continue to come out from the Eurozone,” the bond trader said.

At the close of trading last Friday, yields on all benchmark tenors dropped. The three-month, six-month and one-year papers went down 22.7 bps, 22.6 bps, and 23.8 bps, respectively, to yield 3.893%, 4.116%, and 4.534%.

At the belly, the two-year Treasury bonds (T-bond) fell the most, fetching 4.508%, down 26.1 bps from the previous week. Yields on the three-, four-, five-, and seven-year T-bonds also declined 21.9 bps, 18.3 bps, 15.3 bps, and 14 bps, respectively, to 4.582%, 4.647%, 4.699%, and 4.749%.

Likewise, the 10-, 20-, and 25-year papers dropped 18 bps (4.759%), 8.6 bps (4.98%), and 8.3 bps (4.98%), respectively.

Moving forward, the bond trader said: “Government yields are still expected to fetch lower from the impact of the latest reduction in the reserve requirement ratio (RRR) [last] week.”

A 50-bp reduction in universal, commercial, and thrift banks’ RRR was implemented last Friday, bringing total cuts to 200 bps.

Yields may also track global rates due to the “dovish tilt” of the European Central Bank and the widely expected rate cut from the Fed, according to the bond trader.

For his part, Robert Dan J. Roces, Security Bank Corp. Treasury Group assistant vice-president and economist, said upside risks to yields will be “repositioning and profit-taking ahead of data-heavy weeks — M3, US Fed decision, local inflation, GDP, and MB policy meeting.”

“We could see yields pull back slightly on some profit-taking prior to the event, given the run that yields have had recently. The overall trend remains intact however, and we continue to see yields move gradually lower towards the end of the year,” ATRAM Trust’s Mr. Liboro said. — Marissa Mae M. Ramos

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