Yield Tracker

By Mark T. Amoguis
YIELDS ON government securities moved sideways last week on better-than-expected January inflation data and the central bank’s decision to keep rates steady.
GS yields — which move opposite to prices — slightly slipped by a week-on-week average of 1.6 basis points (bp), according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s Web site as of Feb. 8.
“Government securities yields were slightly lower [last] week on increased demand from end clients and market participants, who were emboldened by a better than expected inflation figure at 4.4% versus the 4.5% market consensus,” said Carlyn Therese X. Dulay, first vice-president and head of Institutional Sales at Security Bank.
“The slightly lower inflation print led to speculation that the reserve requirement cut would happen sooner rather than later,” she added.
Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said: “Decelerating inflation and BSP’s (Bangko Sentral ng Pilipinas) pause all helped push buying interest in the GS market.”
The increase in prices of widely used goods continued to cool for the third straight month in January to 4.4% from 5.1% in December but faster than 3.4% in January 2018 due to slowing food costs.
The January result was better than the 4.5% median estimate in a BusinessWorld poll of 12 economists and analysts and within the BSP’s 4.3-5.1% forecast range for that month.
January’s inflation print was the slowest in 10 months or since the 4.3% pace recorded in March last year.
As widely expected, the BSP’s Monetary Board kept its policy rates steady for the second straight meeting last Thursday at 4.25-5.25% range.
The central bank also revised lower its inflation estimate this year to 3.1% from 3.2%, while it maintained three percent forecast for next year.
On the other hand, big banks’ reserve requirement ratio (RRR) was left untouched by the BSP on Thursday, but some analysts expect reserve cuts will come before any changes to the key policy rates.
To recall, the central bank cut RRR in two moves last year to 18%, which it described as “procedural” changes to reduce the cost of borrowing money in the financial system. This forms part of BSP Governor Nestor A. Espenilla, Jr.’s long-term goal of bringing down the RRR to single-digit levels when his six-year term ends in 2023.
A bond trader interviewed on Friday said that the market reacted to the better-than-expected January inflation.
However, the bond trader said that much of the gains last week were wiped off before the weekend on speculations of a planned retail Treasury bond (RTB) sale.
Security Bank’s Ms. Dulay concurred: “Later in the week, yields increased by as much as 30 basis points from the lows established at the peak of the rally after a rumor of a possible (RTB) circulated.”
“Investors are now wary for a possible RTB given reports that the BTr (Bureau of the Treasury) was mulling issuance,” ING’s Mr. Mapa said.
Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), said: “Proposed (RTB) issuance may also increase supply of government securities (though may be seen as a good move to lock long-term government borrowings at lower interest rates/borrowing costs).”
At the close of trading on Friday, GS yields ended mixed across the board with rate on three-month debt inched up by 0.4 bp to 5.440%, while six-month and one-year papers dipped by 2.3 bp and 3.7 bp, respectively, to 5.790% and 5.940%.
The belly of the curve saw rates on two-, three-, four-, and five-year bonds went down by 6.7 bp, 10 bp, 10.5 bp, and 8.3 bp, respectively, to 5.947%, 5.970%, 6.001%, and 6.048%. Seven- and 10-year bonds, meanwhile, increased by 0.1 bp and 7 bp, respectively, to 6.182% and 6.326%.
At the long end, yields on 20- and 25-year debts rose by 9.1 bp and 7.3 bp, respectively, to 6.611% and 6.699%.
For this week’s trading, RCBC’s Mr. Ricafort said that “short-term local interest rates could continue to go down and catch up with the bigger cumulative declines in long-term local interest rates.”
The bond trader said the market will watch out for further details of the rumored RTB sale.
“Also, will the timing of RTB sale force BSP to reduce RRR? Those are the factors we’re looking into [this] week,” the bond trader said.
“[M]arket players will be looking to the upcoming auction schedule for [this] week for direction as the rally appears to have ran out of steam, awaiting fresh leads and a possible easing move from the BSP,” ING’s Mr. Mapa said.
Security Bank’s Ms. Dulay expects “GS levels to move depending on the results of Tuesday’s seven-year bond auction.”
The Bureau of the Treasury will offer Treasury bills worth P20 billion today and fresh seven-year debt amounting to P20 billion tomorrow.