YIELDS on government debt ended mixed last week as concerns over elevated inflation at home and in the United States kept rate hike bets alive, with traders also positioning before the Philippine central bank’s policy meeting on Thursday.
GS yields, which move opposite to prices, inched up by an average of 0.89 basis point (bp) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Aug. 20 published on the Philippine Dealing System’s website.
At the short end, the yield on the 91-day Treasury bills (T-bills) rose 5.39 bps week on week to 5.0025%, while rates of the 182- and 364-day T-bills went down by 1.73 bps and 5.78 bps to 5.3212% and 5.6593%, respectively.
At the belly, yields ended mostly higher, with the three-, four-, five-, and seven-year Treasury bonds (T-bonds) rising by 1.23 bps (to 6.6877%), 3.51 bps (6.9293%), 5.03 bps (7.0726%), and 3.84 bps (7.2124%), respectively. Meanwhile, the rate of the two-year tenor decreased by 1.24 bps week on week to 6.335%.
At the long end, the 10-year tenor went down by 1.67 bps to yield 7.3052%, while rates of the 20- and 25-year notes inched up by 0.6 bp and 0.63 bp to 7.505% and 7.5025%, respectively.
GS volume traded reached P38.93 billion on Thursday, lower than the P89.06 billion a week earlier. Philippine financial markets were closed on Friday for Ninoy Aquino Day.
Yields moved sideways as players took positions based on their monetary policy expectations here and in the US, analysts said.
This came as the release of minutes of the US Federal Reserve’s July policy meeting revived rate-hike expectations in the world’s largest economy following a string of softer-than-expected data.
“Yields were little moved following the release of the FOMC (Federal Open Market Committee) minutes due to mixed developments from the US overnight. The latest minutes indicated that more US policymakers are teetering toward a rate hike, which could exert further upward pressure on US Treasury yields,” a bond trader said in an e-mail.
“The Fed maintained a relatively hawkish stance, citing elevated inflation and high uncertainty, partly due to the Middle East conflict. The Fed’s hawkish tone creates a challenging environment for Philippine government securities. Even with some softer-than-expected US economic data, US rate uncertainty continues to put upward pressure on local yields,” Melani C. Pisiao, head of the Treasury Trading Department at Bank of Makati (A Savings Bank), Inc., said in a Viber message.
Concern about inflation deepened at the Federal Reserve’s meeting last month, with “several” policymakers ready to raise interest rates and “many” saying a hike in borrowing costs would be needed if inflation does not decline to the US central bank’s 2% target, the minutes of the session showed on Wednesday, Reuters reported.
The policymakers who favored a rate increase at the meeting “remarked that price pressures appeared broad-based and judged that the (policy-setting) Committee should adopt a more restrictive policy stance to meet its commitment to achieving its price-stability and maximum employment goals on a sustained basis,” the minutes of the July 28-29 meeting said. Failure to do so, they argued, would risk “a steeper and potentially more costly sequence of tightening moves at a later stage.”
The Fed voted at that meeting to hold its benchmark interest rate in the current 3.5%-3.75% range, but with three policymakers dissenting in favor of a quarter-percentage point hike.
A larger group of “many” participants “assessed that policy tightening would likely be necessary if inflation did not decline,” the minutes said.
The minutes, covering Fed Chairman Kevin Warsh’s second meeting as head of the central bank, showed central bankers already delving into some of the broader issues he wants to pursue as part of a possible overhaul of how the Fed operates.
Rate futures markets continued to price better-than-even odds that the Fed will begin raising rates at its Oct. 27-28 meeting and, failing that, a very high probability of a rate hike at its last meeting of the year in December.
The Fed is expected to hold its policy rate steady again at its Sept. 15-16 meeting after recent data showed inflation easing slightly and firms unexpectedly shedding jobs in July. The data has left officials still divided over whether rate hikes will be needed to slow inflation further, but also more cautious about the strength of the labor market and the risks to their goal of maintaining full employment.
Meanwhile, the US’ move to stem a rout in long-dated bonds helped ease the global market volatility seen earlier this week, Ms. Pisiao said.
“The announcement that the US Treasury (UST) would at least double its long-dated bond buybacks helped push UST yields lower. This provided some relief to the Philippine bond market. Philippine GS yields responded positively, with selected tenors declining by an average of 7.22 bps week on week.”
“Local bond yields also reacted from the expiration of the 60-day memorandum of understanding between US and Iran without a definitive deal to end the conflict in the Middle East. This development introduced further uncertainty in the local bond market,” the bond trader added.
At home, focus is on the Bangko Sentral ng Pilipinas’ (BSP) policy meeting on Thursday (Aug. 27), the bond trader said. A BusinessWorld poll showed that 19 of 24 analysts expect the Monetary Board to raise the target reverse repurchase by 25 bps for a third straight meeting this week as inflation stays well above target.
“Market participants were somehow anticipating a potential BSP policy rate hike this month. However, traders have not been able to position on this projected move by the central bank. This is mainly due to mixed policy cues from the recent pronouncements by BSP Governor Remolona,” the trader said. “While higher crude oil prices brought by Iran conflict continue to raise concerns in the local bond market, participants are starting to grow wary of further domestic inflationary pressures which may reoccur in the coming months apart from volatile energy prices. In particular, the recent economic disruption due to the impact of prolonged flooding from the substantial habagat (monsoon) rainfall may exert upward pressure on local food items.”
“The BSP faces a difficult balancing act because of the weakening peso and inflation remaining above its 2%-4% target,” Ms. Pisiao added.
The Monetary Board has raised benchmark rates by a cumulative 50 bps since April, bringing the policy rate to 4.75%.
BSP Governor Eli M. Remolona, Jr. said last week that they stand ready to adjust their policy stance as necessary to bring inflation back to their target amid broadening price risks, especially with the Middle East conflict still unresolved.
This, even as he earlier said that weak Philippine economic growth somehow eases the pressure on the central bank to take aggressive action.
Philippine GDP growth slowed to a new post-pandemic low of 2.3% in the second quarter. For the first half, the economy expanded by an average of 2.6%, below the government’s 3.5%-4.5% full-year goal.
Meanwhile, headline inflation slowed to a four-month low of 6.2% in July, but this was the fifth straight month that it settled above the central bank’s 3% target and 2%-4% comfort band.
Year to date, inflation averaged 5%. The BSP sees the headline print averaging 6.4% this year.
For this week, both analysts said the market’s mood may stay cautious before the BSP policy review, and that yields could move sideways with an upward bias as they await clues on the central bank’s policy direction.
“Likewise, the release of the personal consumption expenditures inflation report on Aug. 26, which will indicate the ongoing US inflationary environment, could firm views of a near-term US policy rate hike,” the trader added. — Pierce Oel A. Montalvo with Reuters
Debt yields mixed on Fed, BSP policy view
Philippines Pandemic
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