By Isa Jane D. Acabal, Researcher
YIELDS on government securities (GS) traded in the secondary market mostly climbed last week as investors turned cautious amid lingering inflation risks, uncertainty over the monetary policy outlook, and continued peso weakness.
GS yields, which move opposite to prices, rose by an average of 10.02 basis points (bps) week on week, according to PHP Bloomberg Valuation Service Reference Rates as of Oct. 30 published on the Philippine Dealing System’s website.
At the short end of the curve, rates of the 91-, 182-, and 364-day Treasury bills (T-bills) went up by 5.99 bps to 5.8137%, 15.05 bps to 6.3%, and 13.86 bps to 6.5727%.
Yields at the belly also climbed across all tenors week on week. The two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) jumped by 13.96 bps (to 7.3282%), 13.13 bps (7.6238%), 12.5 bps (7.8371%), 12.72 bps (7.9768%), and 15.42 bps (8.1332%), respectively.
At the long end, the 10-year note’s rate rose by 7.97 bps week on week to 8.1337%. Meanwhile, the yield on the 20-year bond slipped by 0.35 bp to 7.8633%, while that on the 25-year debt edged down by 0.04 bp to 7.8635%.
GS volume traded dropped to P14.17 billion last week from P16.24 billion previously.
“The yield curve bear-steepened [last] week driven by persistent inflationary concerns, currency weakness, and expectations of a higher-for-longer global rates environment,” Lodevico M. Ulpo, Jr., vice-president and head of fixed income strategies at ATRAM Trust Corp., said in a Viber message.
He said the Bangko Sentral ng Pilipinas’ (BSP) hawkish tone following its 50-bp rate hike on Oct. 22 weighed on market sentiment, triggering a sell-off.
“Selling pressure was particularly evident in the belly of the curve following the decision, although opportunistic buying emerged later in the session as investors took advantage of more attractive yield levels, helping pare some of the earlier losses,” he said.
“Government bonds traded cautiously during the early part of the week, influenced by domestic supply pressures and expectations of further monetary tightening. The partial award of the dual-tranche bond auction reflected the subdued risk appetite, while the peso’s depreciation to record lows exerted additional upward pressure on yields.”
Winson Phoon, associate director of fixed-income research, and Erine Yu, fixed-income research analyst at the Maybank Investment Banking Group (MBIG), also said the week-on-week increase in GS yields “reflected the market’s continued uncertainty of the BSP’s terminal policy rate following the surprise 50-bp rate hike.”
“The weaker peso and lingering inflation concern amid firm crude prices also kept the policy outlook uncertain, contributing to a more cautious tone and further price discovery at higher levels,” MBIG said in an e-mail.
A bond trader said in an e-main that the peso’s continued depreciation in the early part of the week put upward pressure on yields due to its expected impact on inflation and, consequently, the BSP’s policy stance.
The peso again closed at new record lows on Monday and Tuesday, extending its losing streak from in the prior week. Its new all-time-low close now stands at P64.17 a dollar.
On Wednesday, the currency rebounded after President Ferdinand R. Marcos, Jr. said the government would do all that it can to defend the peso, with the recovery continuing for the rest of the week. The peso finished at P63.74 on Friday.
Meanwhile, the trader said last week’s auction results showed that the government was capping the rise in debt yields.
“The divergence on the outcomes between the short-term and long-term issuances hinted the government’s appetite for cheaper borrowing. Likewise, this was reflective of strong investor demand for money market instruments amid increased domestic market volatility. The partial award on the latest long-term bonds also helped in managing upward pressures on longer-dated yields.”
For its part, MBIG said the Bureau of the Treasury’s move to still make partial awards for the bonds despite higher yields may have led to some upward rate pressures.
“The three-year cut off at 7.78% and average awarded at 7.74%, roughly 26 bps above the 7.4793% prevailing secondary market levels, with the average awarded yields marking the highest level for a three-year auction since 2006. Meanwhile the 10-year was cut off at 8.3% and average awarded at 8.189%, around 11 bps above the 8.0808% prevailing secondary market levels.”
The bond trader also said that the stronger-than-expected US Personal Consumption Expenditure inflation data also put upward pressure on yields, as these keep the US Federal Reserve on track for additional rate hikes in the coming months.
“While local yields were not directly moved by the Federal Reserve’s decision to pause hikes and keep US policy rates unchanged during [last] week’s policy meeting, the pause provided some strength to the peso, which capped the strong upward pressures on yields,” the trader added.
For this week, the trader said GS yields may continue to climb on expectations of faster October Philippine inflation.
“We expect the yield curve to remain sensitive to incoming inflation data on Nov. 5 and growth data on Nov. 9, as these should provide further guidance on the BSP’s policy outlook. Investors will also continue to monitor the peso, global oil prices and developments in US rates. Further peso weakness or an upside surprise in inflation could maintain some upward pressure on yields, while signs of easing price pressures could provide support to the bond market,” MBIG said.
“We expect local bonds to trade cautiously in a shortened trading week as investors turn their attention to the release of October inflation data. Sentiment is likely to remain subdued amid expectations of persistently elevated inflation, reinforcing the BSP’s hawkish stance and increasing the likelihood of further monetary tightening,” Mr. Ulpo said.
The Philippine Statistics Authority will release the October inflation report on Nov. 5. The BSP said on Friday that it expects headline inflation to have settled between 7.1% and 8.1% last month.
This means the headline clip could accelerate above the 7.2% peak recorded in September and April, and could be the fastest print in nearly four years or since the 8.6% in February 2023.
This would also keep inflation above the BSP’s 3% target for the eighth month in a row.
“On the external front, investors will closely monitor upcoming US economic releases, particularly the jobs data and manufacturing prints. Signs of continued economic resilience and persistent price pressures could reinforce expectations of a higher-for-longer rates environment,” Mr. Ulpo added.