Yields rise ahead of hikes

YIELDS on government securities (GS) traded on the secondary market climbed last week as traders factor in the widely expected hike in policy rates on Thursday.
On average, GS yields rose by 8.39 basis points (bp) week-on-week on Friday as bond prices of most notes dipped from a week ago levels, data from the Philippine Dealing & Exchange Corp. showed.
“Prospects of inflationary pressures after Typhoon Ompong and weaker peso recently increased the odds/possibility of another +0.50 increase in local policy rates on Sept. 27, 2018. Thus, interest rates in the secondary market mostly increased, specifically the 3-month to 7-month tenors,” said Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC).
First Metro Asset Management, Inc. (FAMI) agreed, saying in a separate interview, “The market is still expecting another round of rate hike by the BSP (Bangko Sentral ng Pilipinas) given the high inflation in August. Market expectation is that the BSP will raise rate next week by another 50bps. So [we think] that would give more confidence to the investors.”
Last week, the Department of Agriculture reported that the total damage brought by Typhoon Ompong to farms in Regions 1 to 4 reached P14.27 billion. Of this, 62.82% or P8.97 billion covered rice lands, equivalent to 435,997 metric tons of production loss or 8.64 days of rice consumption in the Philippines. The typhoon’s damage to the whole agriculture sector totalled 553,704 hectares, with an estimated production loss of 731,294 metric tons.
Meanwhile, BSP Governor Nestor A. Espenilla, Jr. remained committed to “take strong immediate action” in response to the faster-than-expected 6.4% inflation rate recorded in August, as well as to address “excessive volatility” in the currency market.
The eight-month increase in prices averaged 4.8%, well above the 2-4% target band. Furthermore, the Philippine peso weakened against the US dollar to close at P54.04 on Friday from P53.97 a week ago.
At the secondary market, movement was focused in the short end to the belly of the curve.
Treasury bills (T-bill) rose, with 91-day papers posting the biggest gain as it climbed 47.86 bps to 4.01%. Meanwhile, the 182-day and 364-day T-bills added 6.93 bps and 20.83 bps to 4.52% and 5.38%, respectively.
Bonds at the belly of the curve also surged. The two-year Treasury bonds (T-bond) yielded 6.13%, up 39.02 bps. Meanwhile, the three-year and seven-year bonds were quoted at 6.09% and 6.87%, 32.22 bps and 11.56 bps higher than week-ago levels, respectively.
Meanwhile, the longer tenors rallied, with the 10-year and 20-year T-bonds yielding 6.9% and 7.54%, down 65.49 bps and 12.23 bps, respectively, from a week ago.
“The short tenors are still the “flavor of the month” of investors and fund managers. You can see that even T-bills are getting more volume this past few weeks. So, the demand is still in the short-term tenors,” FAMI said.
Nonetheless, RCBC’s Mr. Ricafort noted there was some correction in the longer end of the curve.
“Some manufactures reportedly agreed to keep prices unchanged for the next three months [which] could help curb/limit inflationary pressures for now. This may have led to some healthy downward correction in the longest-dated tenors,” he said.
This week, analysts said yields will continue to rise ahead of the Sept. 27 BSP meeting.
“There could still be some residual upside in local interest rates in the secondary market…in view of the widely expected +0.50 hike [in] policy rates, a day after the highly expected +0.25 hike in the key short-term US interest rates by the Federal Reserve on Sept. 26,” Mr. Ricafort said.
For FAMI, “Once BSP raises rates [this] week, we will see the yield curve to stabilize/will move sideways. [Traders] will wait for another catalyst that will drive the market up.” — Carmina Angelica V. Olano