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Yields on gov’t debt rise on inflation expectations

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YIELD 041618

MARKET EXPECTATIONS of faster inflation at home and developments abroad caused yields on local government securities (GS) to move upwards last week.

GS yields rose by an average of 11.79 basis points (bps) week-on-week, data from the Philippine Dealing and Exchange Corp. as of April 13 showed.

In the secondary market, only the four- and seven-year Treasury bonds (T-bonds) rallied, with almost all other tenors recording upward yield movements. In the short-end of the yield curve, the 91-, 182- and 364-day Treasury bills (T-bills) saw their rates go up by 24.46 bps (3.3716%); 33.21 bps (3.9196%); 87.07 bps (4.1893%), respectively.

In the belly, yields on the two-, three-, and five-year T-bonds increased 8.98 bps, 4.88 bps, and 6.90 bps, fetching 4.2411%, 4.5867%, and 5.2298%, respectively. Meanwhile,rates of the four- and seven-year debt papers saw their yields go down 43.73 bps and 71.28 bps, yielding 4.9556% and 5.7443%.

In the long-end, yields on the 10- and 20-year papers increased by 10 bps (6.05%) and 57.44 bps (7.0964%), respectively.

“There has been a general upward pressure on yields [last] week. Trading started slow from the break, but has picked up towards the end of the week,” said Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines.

The economist attributed the upward pressure on yields to higher “inflation expectations” by the market with price levels seen to “remain elevated” in the coming months until the first half of 2018 which will “consequently keep upward pressure on yields.”

A bond trader concurred, saying: “Upward pressure was seen for most of the session on expectations for faster inflation onshore and Treasury yield increases.”

The bond trader added that the borrowing program by the Bureau of the Treasury (BTr) “also forced upward momentum,” although partial awards seen at recent auctions “offered some counter” as dealers had to flock to the secondary market.

Meanwhile, Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (LANDBANK), pointed to a flurry of developments abroad that largely influenced yield movements.

Early last week, Mr. Dumalagan noted yields receiving some boost from the “constructive speech” of Chinese President Xi Jinping at the Boao Forum for Asia. “Instead of matching US President Donald J. Trump’s protectionist tone, the Chinese leader talked about plans to further open up China’s economy to the rest of the world… [underscoring] China’s intention to reduce tariffs for autos and enforce the legal intellectual property of foreign firms,” he said.

While overall yields went northward, Mr. Dumalagan noted, volatility was elevated following the escalating tensions between the US and the Russia-Syria coalition with US President Trump issuing threats of a possible military action in Syria following the latter’s alleged involvement in chemical weapon attacks.

“This unexpected political development temporarily reduced yields on Thursday, despite firm US inflation data and hawkish FOMC (Federal Open Market Committee) minutes,” the LANDBANK economist said referring to the US Federal Reserve’s monetary policy making body.

“The drop in yields, however, was short-lived, as interest rates bounced back on Friday after US President Trump tempered his missile threat against Syria… Moreover, yields also recovered on the last day of the week amid lingering expectations of further US rate hikes ahead,” he said.

Minutes of the Federal Reserve’s March meeting showed members of the FOMC unanimously approving a rate hike amid expectations of higher economic growth and inflation in the US with further hikes expected by the market sometime in June and September.

At home, market expectations are leaning towards the Bangko Sentral ng Pilipinas increasing interest rates after inflation data for March recorded a 4.3% reading year-on-year, bringing the January-March result to 3.8%, which is at the upper-end of the government’s 2-4% inflation target this year. This prompted the central bank to signal a “measured” policy response. The BSP’s Monetary Board will next review its policy stance on May 10.

Meanwhile, the BTr made a partial award of seven-year T-bonds it auctioned off last Wednesday, raising P7.932 billion with bids by banks reaching P20.668 billion, double the planned P10 billion.

Looking forward, analysts expect a continued upward movement in yields.

“[Y]ields will be on an uptrend due to inflation pressures that are expected to be on the top end of the government’s current inflation target,” UnionBank’s Mr. Asuncion said.

For LANDBANK’s Mr. Dumalagan: “[Y]ields could drop, as safe-haven demand could increase amid on-going tensions involving the alleged chemical weapons attack in Syria…and might be accompanied by a re-escalation of the US-China trade dispute.”

“These geopolitical concerns might more than offset the impact of potentially upbeat US reports on retail sales and housing. These geopolitical developments could also act in tandem with likely weaker Chinese GDP growth in exerting downward pressure on yields,” Mr. Dumalagan added. — Denise A. Valdez