Yields on government debt drop on hints of RRR cuts

YIELDS ON government securities fell as investors wait for catalysts after the Bangko Sentral ng Pilipinas (BSP) hinted on an additional cut in banks’ reserve requirement ratio (RRR) before yearend.

Debt yields, which move opposite to prices, went down by 2.2 basis points (bps) on average week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of Oct. 18 published on the Philippine Dealing System’s website.

“Yields tiptoed lower but volume was relatively light given the lack of fresh leads,” Nicholas Antonio T. Mapa, senior economist at ING Bank NV-Manila Branch, said in an e-mail.

“BSP Governor Benjamin E. Diokno gave hints of an end to reverse repurchase (RRP) rate cuts but also said reserve requirement ratio (RRR) may be reduced, prompting expectations for additional liquidity to help push down yields,” Mr. Mapa said.

He added that “government spending continued to free up funds previously trapped in the Treasury single account of the BSP while [foreign exchange] operations of the central bank also yielded fresh Peso funds into the system, keeping pressure on yields to edge lower.”

““The recent headline regarding the RRR cut of bond issuances from 6% to 3% effective Nov. 1 emboldened traders to be more aggressive in taking positions even as yearend is approaching,” said Security Bank Corp. First Vice-President and Head of Institutional Sales Carlyn Therese X. Dulay.

“After the Bureau of the Treasury announced they have no plans of issuing additional supply this year and Governor Diokno gave indications that the Monetary Board (MB) is open to more RRR cuts in 2019, market participants became more confident to lock in funds in bonds,” Ms. Dulay added.

Mr. Diokno earlier said the another RRR cut could be on the table depending on relevant economic data to be released in the coming months.

The BSP announced last month that it will reduce lenders’ RRR by another 100 bps effective November to bring the reserve requirement of universal and commercial banks to 15% from 16%. The reserve ratios of thrift banks will also be cut to five percent from the current six percent, and to three percent from four percent for rural and cooperative banks.

Mr. Diokno has pledged to reduce the RRR to a single-digit before his term ends in July 2023.

The MB also said it is reducing the reserve requirement rate for bonds issued by banks and quasi-banks to three percent effective next month in a bid to deepen the local debt market.

This rate is lower than the required reserves of other debt instruments issued by banks such as long-term negotiable certificates of time deposits which is currently at four percent.

On the other hand, the BSP chief said the central bank is likely done cutting policy rates for the year.

The BSP has cut benchmark rates by 75 bps thus far this year — announcing 25-bp cuts at its May 9, Aug. 8 and Sept. 26 policy meetings — to bring the interest rate on its overnight reverse repurchase facility to four percent, the overnight deposit rate to 3.5%, and the overnight lending rate to 4.5%.

These cuts partially dialed back a cumulative 175-bp increase implemented in 2018 as inflation spiked to multi-year highs.

At the secondary market on Friday, the yields on the 91-, 182-, and 364-day Treasury bills rose by 4.8 bps, 3.3 bps, and 2.1 bps, respectively, to 3.112%, 3.27%, and 3.637%.

Rates at the belly of the curve all went down. The two-, three-, and four-year debt papers lost 5.1 bps (3.91%), 5.6 bps (4.05%), and 6.1 bps (4.184%). Yields on the five- and seven-year bonds also fell 6.6 bps (4.313%) and 5.9 bps (4.522%).

At the long end, the 20-year bond saw its rate increase by 0.1 bp to 5.073% while the 10- and 25-year papers dipped by 4.4 bps and 0.4 bp to fetch 4.738% and 5.054%, respectively.

Moving forward, Security Bank Corp.’s Ms. Dulay expects yields to “stay rangebound with a downward bias…while waiting for firmer leads in the local front.”

ING Bank’s Mr. Mapa, for his part, noted that “[m]arket players will likely trade lightly for the time [being], positioning ahead of possible fresh supply and with a substantial maturity in the coming month for direction.” — Marissa Mae M. Ramos