Yields on government debt end flat after BSP decision

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YIELD 121718

By Mark T. Amoguis

YIELDS ON government securities were flat last week after the central bank kept policy settings steady amid easing inflation expectations.

Bond yields, which move opposite to prices, inched up by an average of 4.05 basis points (bp) week-on-week, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates posted on the Philippine Dealing System’s Web site on Dec. 14.

“Market players reacted to the BSP (Bangko Sentral ng Pilipinas) policy decision as well as concerns about fresh supply in the pipeline,” said Nicholas Antonio T. Mapa, senior economist at ING Bank N.V.’s Manila branch.

Michael L. Ricafort, economist at Rizal Commercial Banking Corp., said: “Short-term PHP BVAL yields continued to seasonally go up, though slightly in recent weeks, as the accounting year-end draws closer, amid some premium for crossing-the-year funds/deposits (some balance sheet management/window-dressing activities).”

Last Thursday, the central bank’s policy-making Monetary Board (MB) halted its tightening streak for this year as it sees inflation moderating.

The MB voted to keep benchmark interest rates unchanged on Thursday, keeping the range at 4.25-5.25%, which remains at a nine-year high.

Before this pause, in its bid to curb rising inflation expectations, the BSP implemented five back-to-back interest rate hikes since May, totaling to 175 bps.

Last Thursday, the central bank also revised lower its inflation forecasts until 2020. It now sees inflation averaging at 5.2% this year, down from a previous forecast 5.3%. The BSP also now expects inflation to decelerate to 3.18% next year (from 3.5%) and 3.04% by 2020 (from 3.3%).

Inflation eased to 6% in November from a nine-year high of 6.7% recorded in September and October. This brought the year-to-date average at 5.2%, still beyond the 2% to 4% government’s official target.

Bank analysts said the BSP is now at the end of its tightening cycle as inflation is becoming less of a problem.

Two economists also said on Friday that the central bank may now proceed with planned cuts in banks’ reserve requirement ratio next year as inflation is sure to go down. Reducing the mandated bank reserves will free up more cash in the financial system, as lenders can now deploy more funds for lending and investments.

Yields went sideways across the board at the close of the market on Friday. Rates of the 91-, 182-, and 364-day Treasury bills increased by 6.4 bps, 6.10 bps, and 8.6 bps, respectively, to fetch 5.651%, 6.360%, and 6.703%.

At the belly, yields on the two-, three-, four-, five-, seven-, and 10-year Treasury bonds rose by 5 bps, 4.1 bps, 4.3 bps, 4.9 bps, 5 bps, and 1.5 bps, respectively, to 6.776%, 6.876%, 6.952%, 7.011%, 7.058%, and 7.025%.

Meanwhile, rates of the 20- and 25-year debt papers dipped by 0.10 bp and 1.2 bps, respectively, to close at 7.494% and 7.533%.

For this week’s trading, RCBC’s Mr. Ricafort said: “[S]hort-term PHP BVAL yields could continue to slightly go up, as seen in recent weeks, as the accounting year-end about two weeks away.”

He added that markets will also anticipate the widely expected 0.25% Fed rate hike on Dec. 19.

For his part, ING’s Mr. Mapa said this week’s bond yields “will likely move sideways with most dealers out for the holidays while traders also awaiting borrowing program for 1Q 2019 and also wary of fresh supply in the near term.”