Yields on gov’t debt end flat

By Mark T. Amoguis, Researcher
BOND YIELDS moved sideways last week amid auction results, the affirmation of the country’s credit rating and hawkish statements from the Bangko Sentral ng Pilipinas (BSP).
On average, government securities’ (GS) yields — which move opposite to prices — went down by 1.19 basis points (bp), data from the Philippine Dealing & Exchange Corp. as of July 20 showed.
“GS rates dipped ever so slightly as traders scrambled to place funds in the secondary market after the rejection of the seven-year [bond] auction and the partial T-bill (Treasury bill) award,” a bond trader interviewed last Friday said.
“Client-driven deals were the focus with institutional players mindful of the BSP’s hawkish commentary as Governor Nestor A. Espenilla, Jr. pledged a decisive strike come August,” the trader added.
The government decided to borrow just P12.101 billion out of the planned P15-billion at the T-bills auction last Monday.
Broken down, the Bureau of the Treasury (BTr) raised P4 billion worth of 91-day papers as planned, P3.424 billion worth of 182-day debt (falling short of a P5-billion program), and P4.677 billion worth of 364-day notes (out of P6 billion).
Meanwhile, the BTr rejected all bids for its offer of P15-billion reissued seven-year Treasury bonds (T-bonds) with a remaining life of six years and eight months last Tuesday as investors demanded higher rates ahead of the August policy meeting of the central bank.
The BSP chief signalled last Friday that the central bank is considering a “strong” monetary policy action at its meeting next month to temper rising inflation.
Inflation hit a fresh five-year high of 5.2% in June. This brought the year-to-date average to 4.3%, already beyond the 2-4% central bank target.
The central bank’s policy-setting Monetary Board tightened rates through two 25-bp increases in its May and June meeting, bringing benchmark rates to a 3-4% range.
Michael L. Ricafort, economist at the Rizal Commercial Banking Corp. (RCBC), said yields on government bonds “corrected lower [last] week after global crude oil prices eased to new three-week lows, amid expectations that the risk of trade war involving the US, China, EU, Canada, and other developed countries could lead to slower global economic growth and slower inflation…”
This, in turn, “could lead to less Fed rate hike/s going forward, despite the fact that US Federal Reserve Chairman Jerome Powell reiterated gradual Fed rate hikes for now,” he explained.
“Local yields also eased after Fitch Ratings reiterated the country’s credit ratings and after some members of the country’s economic team reiterated commitment to further pursue additional tax reform measures,” Mr. Ricafort added.
Last week, Fitch Ratings affirmed the country’s “BBB” rating — a notch above minimum investment grade — with a “stable” outlook amid “favorable” growth outlook despite “overheating risks,” such as rising inflation, rapid credit growth, and widening trade deficit.
Moody’s Investors Service likewise affirmed its “Baa2” rating on the country — also one notch above minimum investment grade — and “stable” outlook, citing the economy’s overall strength, even as it flagged risks from rising inflation and the planned shift in government form.
At the secondary market last Friday, the short end of the curve ended mixed after the yield on the 91-day T-bill dropped 2.25 bps to 3.2552%, while the six-month and one-year T-bills gained 34.98 bps and 6.61 bps, respectively, to yield 4.3583% and 4.6988%.
In the belly, yields on the two-, five- and seven-year T-bonds shed 23.89 bps, 31.71 bps, and 4.96 bps, respectively, fetching 4.8772%, 5.6936%, and 6.2994%. Rates of the three- and four-year notes, meanwhile, climbed 5.49 bps (5.0197%) and 4.11 bps (5.6786%).
At the long end, 10-year debt’s yield went down by 5.11 bps to 6.3950%, while 20-year bond saw its yield inch up by 4.82 bps to 7.4071%.
The trader said for this week, “market players await the BSP’s inflation forecast with investors bracing for yet another above 5% inflation print.”
RCBC’s Mr. Ricafort said GS yields could continue to move “sideways to slightly lower” this week due to a downward correction in global crude oil prices “that could somewhat ease inflationary pressures and provided that the US dollar peso exchange rate remained relatively steady/confined in a narrow trading range as seen over the past month.”
The economist added: “[F]urther hike/s in local policy rates cannot be ruled on the next BSP monetary policy-setting meeting on Aug. 9, 2018 amid relatively higher inflation among five-year highs and weaker peso exchange rate vs. the US dollar among 12-year highs recently.”