Yields on government debt decline on Fed, BSP rate cut expectations

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YIELDS ON government securities (GS) traded on the secondary market fell across the board as expectations of rate cuts by the US Federal Reserve and the Bangko Sentral ng Pilipinas’ (BSP) remain.

On average, GS yields went down by 7.3 basis points (bp) week on week, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates as of June 28 published on the Philippine Dealing System’s website.

“GS yields continued to edge lower, tracking the general expectation that the Fed could cut policy rates as early as July. Global bond yields led by the 10-year US Treasury have fallen, with the local bonds tracking this move,” Nicholas Antonio T. Mapa, senior economist at ING Bank NV-Manila Branch, said in an email.

“Expectations for a slower inflation rate for the month of June and less borrowing from the Bureau of the Treasury (BTr) also contributed to the downward pressure on rates,” Mr. Mapa added.

In a separate email, a bond trader shared the same view: “Local yields fell [last] week due to growing market sentiment of dovish central bank policy guidance globally, mainly from the Fed and the BSP.”

The trader said that dovish sentiment among traders remained after the BSP revised down its inflation forecast during its June 20 Monetary Board (MB) meeting. The trader also cited BSP Deputy Governor Diwa G. Guinigundo’s comment that there is still room for monetary policy easing on the expectation that inflation will continue its downtrend despite an uptick in May.

At its Monetary Board’s meeting, the BSP slashed its inflation projection to 2.7% for this year from the 2.9% expected in May and to 3% from 3.1% for 2020.

Meanwhile, on Friday, the BSP Department of Economic Research said inflation likely settled within the 2.2-3% range last month amid lower rice and domestic oil prices, coupled with a downward adjustment in electricity rates and the peso’s appreciation.

The higher end of BSP’s June estimate compares to May’s actual print of 3.2%, which broke the six consecutive months of slowdown from September and October’s nine-year-high of 6.7%. Meanwhile, the floor of BSP’s estimate would be the slowest since November 2016’s 2.1%, while the ceiling would be the slowest since December 2017’s 2.9%.

Analysts noted that the longer end of the yield curve moved the most last week.

“Yields reacted to the second half borrowing program with the BTr targeting longer dated bonds for issuance given the outlook on inflation,” ING Bank’s Mr. Mapa said.

“Huge movements on the long-term end of the yield curve were observed during the week as investors closely monitored any indications on the possible outcome of the trade discussions between the US and China during the G-20 summit [last] weekend,” the bond trader said.

The trader added that external developments caused local yields to end flat last week.

“Yields initially fetched lower as geopolitical tensions between the US and Iran heightened after the imposition of US sanctions on the latter. However, towards the end of the week, yields rebounded on account of increased risk appetite from some positive trade developments ahead of the G-20 summit…, during which the US and China are seen to reach a consensus over their current trade conflicts,” the trader said.

Treasury bills (T-bill) eased across the board led by the 91-day debt papers which yielded 4.46%, down 10.7 bps from the week-ago level. The 182-day and 364-day T-bills went down 7.9 bps and 6 bps to yield 4.76% and 4.97%, respectively.

Bonds at the belly of the curve likewise fell. The two-, three- and four-year Treasury bonds (T-bond) were quoted at 4.95%, 4.96% and 4.98%, down 5.6 bps, 5.2 bps and 4.9 bps, respectively. Similarly, the five-, seven-, and 10-year papers yielded 5%, 5.04%, and 5.07%, which were 4.6 bps, 5 bps and 5.3 bps lower week on week.

Yields on longer-term debt papers also declined, with the 20- and 25-year T-bonds yielding 5.18% and 5.13%, down 9.8 bps and 15 bps, respectively, from a week ago.

For this week, the bond trader said GS yields will continue to decline, “as the likely soft Philippine inflation report might bolster views of more rate cuts from the BSP this year.”

“Likely weak US economic reports on manufacturing and services might also weigh down on yields by fueling bets of a rate cut from the US Federal Reserve as early as July 2019.”

For ING Bank’s Mr. Mapa, “[The] market will likely take its cue from the G-20 outcome, especially [Presidents’] Trump-Xi meeting for direction, while also looking to local inflation for direction.” — Carmina Angelica V. Olano