Yields on gov’t debt surge on inflation expectations

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By Jochebed B. Gonzales
Senior Researcher

YIELDS ON government securities surged amid expectations of faster inflation towards yearend after the central bank tightened monetary policy rates by 50 basis points (bp) last Thursday.

Debt yields, which move opposite to prices, climbed 33.14 bps on average week on week, data from the Philippine Dealing & Exchange Corp. as of Sept. 28 showed.

“Yields rose due to the policy rate hikes of the BSP (Bangko Sentral ng Pilipinas) and the US Federal Reserve,” said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (LANDBANK).

“The recent policy meeting of the BSP kept open the possibility of more rate hikes ahead, while policy guidance of the US affirmed widespread views of steady rate increases until at least 2021.”

Mr. Dumalagan added that the negative impact of Typhoon Ompong (Mangkhut) on agricultural production contributed to higher inflation forecasts for the month of September.

Sharing the same view, Rizal Commercial Banking Corp. (RCBC) Trust Trading Head Helen G. Oleta said market players are keeping an eye on domestic inflation data to be released this Friday after the BSP upwardly revised its forecasts for 2018 and 2019 to 5.2% and 4.3%, respectively, from 4.9% and 3.7% earlier.

“With the 50-bp hike, the central bank is suggesting its expectation on the inflation number. For the rest of the year, we might see elevated inflation not just on the supply side locally but also globally,” Ms. Oleta told BusinessWorld via phone interview.

The BSP has hiked monetary policy rates by a total of 150 bps thus far this year. The 50-bp tightening effective Sept. 28 brought the rate for the overnight reverse repurchase facility to 4.5%, while rates for the overnight lending and deposit facilities are now at 5% and 4%, respectively.

Meanwhile, UnionBank of the Philippines (UnionBank) chief economist Ruben Carlo O. Asuncion described last week’s trading volume as “rather thin as the market was waiting on the sidelines all throughout the week.”

“Expectations for [last] week was sideways with a strong upward bias for yields,” he said. “The market was definitely waiting for the BSP rate action which eventually materialized [last Thursday].”

At the secondary market on Friday, the yield on the three-year bond rose the most, gaining 94.28 bps to close at 7.0339%.

It was followed by yields on the 20- and four-year Treasury bonds (T-bond), which respectively increased by 76.03 bps and 63.39 bps to 8.2969% and 7.4464%.

Also posting significant gains last week were yields on the 91- and 182-day Treasury bills as well those on the seven- and 10-year bonds, which rose 29.76 bps, 13.01 bps, 24.11 bps and 33.26 bps, respectively, to finish at with 4.3094%, 4.6491%, 7.1101% and 7.2348%.

The rate of the two- and five-year T-bonds barely moved, recording gains of 7.4 bps (to 6.1990%) and 0.91 bp (7.0395%), respectively, while the 364-day paper saw its yield dip by 10.71 bps to end with 5.2760%.

“[I]t seems that the 50-bp [increase] is enough at this time,” said UnionBank’s Mr. Asuncion. “Thus, I would expect the market to wait for further leads as September inflation will be out [on Friday], with expectation of a still elevated one.”

LANDBANK’s Mr. Dumalagan also expects debt yields to move sideways with an upward bias this week amid a “likely strong domestic inflation” turnout.

“The local inflation report may solidify views of more rate hikes from the BSP this year. Volatility might remain elevated due to geopolitical concerns abroad,” he said.

The Philippine Statistics Authority will report September inflation data on Friday.