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Yields on gov’t debt drop

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Yield Tracker

YIELD 020419

By Marissa Mae M. Ramos
Researcher

YIELDS ON government securities fell last week amid a risk-off tone in the market following dovish sentiments by the US central bank and expectations for the Bangko Sentral ng Pilipinas (BSP) to keep rates steady, with inflation showing signs of slowing.

On average, debt yields — which move opposite to prices — dropped by 19.06 basis points (bps) from week-ago levels, according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website last Feb. 1.

“Main driver [last] week has been external — the US Federal Reserve kept its interest rate unchanged and hinted that future rate adjustments higher might be limited,” said Deanno J. Basas, president and managing director of ATRAM Trust Corp. (ATRAM Trust).

At home, Mr. Basas noted market expectations of domestic inflation slowing further this year.

“With the Fed move, the market is expecting that BSP will also put rate hikes on hold, especially as local inflation is also seen to move lower. Longer-term bond yields have moved more with investors favoring these bonds to lock in at these higher yield levels,” he said.




Carlyn Therese X. Dulay, first vice-president and head of Institutional Sales at Security Bank Corp. (Security Bank), concurred: “The dovish FOMC meeting fueled the downward trend in addition to strong buying interest from both local and offshore dealers and end clients,” she said, referring to the Fed’s policy-making Federal Open Market Committee.

In addition to the pause in rate hikes, Ms. Dulay also noted expectations the BSP will cut banks’ reserve requirement (RR) ratio. “A possible RR cut in the near future also emboldened market participants to take positions on increased liquidity in the system should the cut be executed soon.”

The Fed opted not to raise interest rates in its policy meeting last week. It previously hinted that it will tighten its interest rates by two times this year. However, some officials said the central bank “will be patient” in raising borrowing costs as it will gauge the economy’s performance.

Meanwhile, at home, the BSP last year raised key rates by a total 1.75 percentage points in an attempt to temper inflation, which hit a nine-year high.

With inflation likely to rebound within the 2-4% target this year, BSP Governor Nestor A. Espenilla, Jr. hinted that the central bank will go back to cutting the reserve ratio for universal and commercial banks, which is presently at 18%.

The BSP chief aims to cut the reserve standard to a single digit before his term ends in 2023.

January inflation data will be released by the Philippine Statistics Authority on Tuesday, while the Monetary Board’s first meeting for this year is scheduled on Thursday.

As trading hours ended in the secondary market last Friday, yields on government debt papers fell across the board from a week ago.

Yields on the 91-, 182-, and 364-day Treasury bills (T-bills) went down by 3.7 bps, 19.1 bps, and 9.2 bps, respectively, to 5.436%, 5.813%, and 5.977%.

At the belly of the curve, the seven-year Treasury bonds (T-bonds) dropped 20.6 bps to fetch 6.181%. The two-, three-, four-, and five-year debt papers were quoted at 6.014%, 6.070%, 6.106%, and 6.131%, respectively, which were 20.2 bps, 19.6 bps, 19.4 bps, and 19.9 bps lower than the rates seen the previous week.

The 10-, 20-, and 25-year T-bonds also went down 22.2 bps (6.256%), 26.4 bps( 6.52%), and 29.4 bps (6.626%), respectively.

Security Bank’s Ms. Dulay expects yields to continue to trade within range this week, even as risk events such as inflation data and the Monetary Board meeting “may cause some volatility.”

For ATRAM Trust’s Mr. Basas: “[W]e might see a bit more downward movement in yields especially if inflation comes out lower than expected and if the BSP statements become more dovish, but we expect it to be limited.”

“We are getting to support levels, with the 10-year [bonds] near 6%. We would not recommend chasing the market beyond these levels, as we expect to see it consolidate here, given how quickly it has moved over the past couple of months,” he said.