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Yields on government debt fall as inflation slows in June

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YIELDS ON government debt papers traded at the secondary market fell across the board last Friday as they tracked auction results and the better-than-expected June inflation data.

Week on week, government securities’ (GS) yields went down by 10.6 basis points (bps), according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates as of July 5 published on the Philippine Dealing System’s website.

A bond trader interviewed said domestic yields were initially higher last Monday after the US and China agreed to resume future trade negotiations during the G20 summit over the previous weekend.

“However for the rest of the week, yields started to decline as market participants started to factor in a softer June Philippine inflation report. The increasing global dovish sentiment abroad following news of the possible appointment of dovish central bankers from the European Central Bank and the US Federal Reserve likewise drove yields lower [last] week,” the bond trader said in an e-mail interview.

Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort had the same view. “Lower inflation data increases the possibility of monetary policy easing by way of another cut in local policy rates, thereby partly causing the latest decline in local interest rate benchmark,” he said in a separate email.

Aside from the stronger peso-dollar exchange rate and continued declines in global bond yields amid the lingering US-China trade war, Mr. Ricafort said the second round of the Bangko Sentral ng Pilipinas’ (BSP) reserve requirement ratio (RRR) cuts also “partly caused the recent decline in yields.”




“Shorter-term tenors mostly posted the biggest weekly declines…amid a possible further cut in local policy rates (due to the latest decline in inflation), in which short-term tenors are more sensitive/highly correlated,” Mr. Ricafort explained, adding that market expectations of rate hikes by the US Federal Reserve this year “also partly supported bigger weekly declines in short-term local interest rate benchmarks.”

After a 100-bp RRR cut across all banks last May 31, the BSP trimmed the reserve ratios of universal and commercial lenders and thrift banks by another 50 bps last June 28 to 16.5% and 6.5%, respectively.

Another 50-bp reduction will be implemented on July 26 to finally bring the RRR of big banks to 16% and thrift banks to 6%, which completes the phased cuts the BSP announced in May.

Carlyn Therese X. Dulay, first vice president and head of Wholesale Treasury Sales at Security Bank Corp., noted the initial increase in bond yields “on profit taking and position trimming,” but said rates started to decline following the results of the three-year Treasury-bond auction last Tuesday.

“The stronger-than-expected rate of the new three-year T-bond that was auctioned by the Bureau of the Treasury (BTr) pushed yields lower as market players were emboldened to take stronger positions though the downtrend was limited,” Ms. Dulay said in an e-mail.

At its first auction for the quarter, the BTr raised P20 billion as planned from its offer of fresh three-year bonds maturing on July 4, 2022 with total tenders reaching P65.911 billion, more than thrice the government’s offer.

The bonds, which carry a coupon rate of 4.75%, fetched an average rate of 4.803% at Tuesday’s auction, 33.3 bps lower than the average rate of 5.136% for the three-year T-bonds awarded on Aug. 29 last year.

Meanwhile, preliminary government data showed headline inflation at 2.7% in June, its slowest in almost two years or since the 2.6% logged in Aug. 2017. This brought the year to date average to 3.4%, which is past the midpoint of the BSP’s 2-4% target range and still above the 2.9% full-year forecast.

Yields were down across the board at the secondary market last Friday. In the short end of the curve, yields on the 91-, 192- and, 364-day Treasury bills (T-bill) declined by 13.1 bps, 21.6 bps, and 11.8 bps, respectively, to 4.329%, 4.544%, and 4.851%.

At the belly, the rates of the two-, three-, four-, five- and seven-year T-bonds declined by 11.9 bps (4.83%), 10.5 bps (4.854%), 8.4 bps (4.891%), 6.8 bps (4.929%), and 5.9 bps (4.978%), respectively.

At the long end, the yield on the 20-year debt papers declined by 12 bps to 5.057%. The rate of the 10-year bond also dropped 7.2 bps to 5%, while the 25-year papers declined seven basis points to close at 5.055%.

“Yields are expected to decline [this] week as the release of the softer-than-expected June inflation report might bolster views of further policy easing from the BSP. Market expectations of possible dovish hints in the June Fed meeting minutes might also exert significant downward pressure on local yields,” the bond trader said.

Similarly, RCBC’s Mr. Ricafort said local interest rate benchmarks “could continue to decline” this week amid the declining trend in bond yields in the United States and in other developed countries, as well as the continued easing of domestic inflation and possible cuts in local and US policy rates. — Lourdes O. Pilar

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