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Yields on gov’t debt flat on Fed rate hike doubts

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By Jochebed B. Gonzales,
Researcher

YIELDS on government securities ended flat last week due to investor preference for bonds over shorter-dated securities amid doubts on the possibility of another US rate hike before yearend.

Debt yields, which move opposite to prices, inched up by 0.67 basis point (bp) on average week-on-week, data from the Philippine Dealing and Exchange Corp. as of Sept. 8 showed.

“Yields moved sideways [last Friday] amid mixed developments abroad,” said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (Landbank).

“Yields initially fell due to soft US non-farm payrolls and dovish remarks from Fed [Gov. Lael] Brainard about low inflation in the US. The decline in yields reversed towards the end of the week following news that the US fiscal plan includes a 3-month suspension of the debt ceiling.”

A bond trader agreed, saying: “Bond yields tumbled as both market players and end-user demand [were] in full form, tracking the move of US Treasuries and [German] Bunds.  A dovish ECB (European Central Bank) and expectations that the Fed can’t hike again in 2017 helped boost bond buying.”

Jobs growth in the US fell short of expectations after the Bureau of Labor Statistics reported only 156,000 additional non-farm payrolls employment in August versus 180,000 estimate by analysts. Unemployment rate was also higher that month at 4.4%, from 4.3% in July.

While the jobless rate had averaged five percent in the last five years, a rate comparable to pre-crisis levels, Fed’s Ms. Brainard said the central bank should be cautious of further raising interest rates as inflation remains below the two-percent target.

Meanwhile, US President Donald Trump signed a three-month extension of debt ceiling which allows the Treasury to borrow money without approval from the Congress.

The 10-year US benchmark bond closed at 2.0507% last Friday, 11.5 bps lower from the previous week’s 2.1657% closing.

In Europe, the ECB kept rates at zero percent while continuing its €60 billion monthly asset purchases “intended to run until the end of December 2017, or beyond, if necessary…” according to ECB President Mario Draghi.

On the domestic front, Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank), said local debt yields were lower last week as the market “has been more likely choosing other earning means.”

“For example, the BSP (Bangko Sentral ng Pilipinas) this week has further eased their mopping up activities because of the increased demand for credit across the board due to the rapidly growing economy,” he said.

At the secondary market on Friday, yields closed lower across the board except those on the 91- and 182-day Treasury bills (T-bills) which rose sharply by 76.81 bps and 42.82 bps, respectively, to 2.89% and 2.9471%, offsetting declines in other tenors.

The yield on the four-year Treasury bond (T-bond) fell the most, by 48.59 bps, to close at 3.7105%. It was followed by the three-, seven-, and 10-year T-bonds which respectively lost 14.72 bps, 14.89 bps and 12.84 bps, to finish with 3.6007%, 4.2771% and 4.5379%.

The five- and 20-year bonds also saw their yields decrease by 10.86 bps and 8.47 bps, respectively, to end with 4.4821% and 5.083%.

The yields on the 364-day T-bills and two-year T-bonds were almost unchanged after shedding 0.76 bp and 1.85 bps, respectively, to 2.8854% and 3.8404%.

“[This week], yields might rise further amid likely stronger US data on producer and consumer price inflation. These reports might improve the chances of another US rate hike this year,” said Landbank’s Mr. Dumalagan.

For UnionBank’s Mr. Asuncion, bond yields are likely to tread the same path as last week’s.