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Yields on gov’t debt drop on dovish Fed, BSP meet

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YIELDS ON government securities went down last week due to dovish remarks from the US Federal Reserve and the Bangko Sentral ng Pilipinas’ (BSP) decision to stand pat on policy and slash its inflation forecasts.

On average, debt yields — which move opposite to prices — dropped by 12.5 basis points (bp) from a week ago, according to PHP Bloomberg Valuation (BVAL) Service Reference Rates as of on June 21 published on the Philippine Dealing System’s website.

“Yields for government securities in the secondary market moved lower week on week due mostly to the dovish Fed… The pause by the Monetary Board, however, slowed the downward trend down,” Carlyn Therese X. Dulay, first vice president and head of Wholesale Treasury Sales at Security Bank Corp., said in an e-mail interview.

Nicholas Antonio T. Mapa, senior economist at ING Bank NV-Manila Branch, said expectations of further rate cuts from the Fed pushed global bond yields lower.

“Local market yields tracked the move of US Treasuries given the dovish outlook for rates,” Mr. Mapa said in an email.

“Meanwhile, despite BSP keeping policy rates untouched, traders reacted to the latest BSP inflation forecasts which showed slightly lower inflation for both 2019 and 2020,” he added.




At its June 18-19 meeting, the US Federal Open Market Committee (FOMC) kept interest rates unchanged but hinted possible rate cuts before yearend. The Fed said it would continue to “act as appropriate” amid market uncertainties.

Meanwhile, back home, the BSP’s policy-setting Monetary Board (MB) similarly held rates steady at its meeting on Thursday on expectations of steady inflation and economic growth in the coming months.

The MB left the interest rate on the BSP’s overnight reverse repurchase facility untouched at 4.5%, it announced after its review on Thursday. The interest rates on the overnight lending and deposit facilities were likewise held steady at five percent and four percent, respectively.

The central bank also revised its inflation forecasts to 2.7% (from 2.9%) for this year and to 3% (from 3.1%) for 2020.

BSP Governor Benjamin E. Diokno said the central bank decided to stand pat on its policy stance to assess the impact of previous adjustments.

At its meeting last May 9, the MB cut key rates by 25 basis points. The BSP also reduced the reserve requirement ratios of lenders by a percentage point effective May 31 to 17% for universal and commercial banks, 7% for thrift banks, and 4% for rural and cooperative banks. The reserve ratios of big banks and thrift lenders will be reduced further to settle at 16% and 6%, respectively, on June 28 and July 29.

At the secondary market last Friday, yields were lower than week-ago levels across the board. The three-month, six-month, and one-year Treasury bills (T-bill) went down by 7.5 bps, 9.6 bps, and 18.4 bps, respectively, to yield 4.567%, 4.839%, and 5.029%.

Rates of the debt papers at the belly of the curve also fell, with the two-, three- and four-year bonds dropping 9.4 bps, 10.8 bps, and 11.6 bps, respectively, to fetch 5.005%, 5.011%, and 5.024%. Yields on the five- and seven-year notes also declined by 12 bps (5.043%) and 12.4 bps (5.087%).

Yields on the 10-, 20-, and 25-year tenors likewise dropped by 12.3 bps, 10.3 bps, and 23.4 bps, respectively, to 5.125%, 5.275%, and 5.275%.

“We expect yields to trade within range [this] week as there are no new catalysts in the street,” Security Bank’s Ms. Dulay said, adding that she expects “yields to follow the US Treasury yield movement” in the meantime.

She noted the Philippine Statistics Authority’s release of inflation figures next week and the third-quarter borrowing program of the Bureau of the Treasury as major catalysts in the coming days.

Headline inflation accelerated in May following six consecutive months of slowdown, settling at 3.2% last month, up from the three percent in April but still slower than the 4.6% recorded in May 2018. Year to date, inflation averaged 3.6%, past the midpoint of the BSP’s 2-4% target for the year.

For his part, ING Bank’s Mr. Mapa said the “[m]arket will take its cue from global developments (G20 meeting up next) for direction.”

US President Donald J. Trump confirmed on Tuesday that he is set to meet Chinese counterpart Xi Jinping in the G20 Summit in Japan this week to discuss a possible trade deal. Both leaders launched a truce in the last G20 Summit in December 2018 that was interrupted after both sides slapped higher tariffs on each other’s goods in May. — Marissa Mae M. Ramos