Yields move higher on hawkish Fed statement

GOVERNMENT SECURITIES (GS) at the secondary market moved higher, backed by the hawkish statements from the United States Federal Reserve and ahead of the upcoming 20-year auction and US non-farm-payroll (NFP) data.

Bond yields, which move opposite to prices, rose by an average of 4.96 basis points ( bps) week on week, data from the Philippine Dealing & Exchange Corp. as of March 24 showed.

Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines ( Landbank), said the US central bank downplayed the slowdown in the first quarter and affirmed its plan to gradually hike interest rates this year.

Mr. Dumalagan noted that in part, better- than- expected US data on trade and initial jobless claims pushed government securities yields higher.

The US Fed kept interest rates steady during its May 2-3 meeting, shrugging aside weak firstquarter growth as “transitory,” adding that the central bank was still on track with two more hikes this year. “Yields on the short end were slightly lower while the long end rose slightly week on week ahead of the upcoming 20-year auction scheduled on May 16, 2017, and ahead of NFP report which is expected to print at 190K-200K,” said Carlyn Therese X. Dulay, vicepresident and head of institutional sales at Security Bank Corp.

According to the May 5 report, US job creation in April bounced back from a disappointing March, with nonfarm payrolls growing by 211,000 and the unemployment rate falling to 4.4%, its lowest since May 2007.

US economists had been expecting payroll growth of 185,000 and the headline jobless rate to tick up a tenth to 4.6%. The payroll increase nearly tripled the dismal March number, cementing a Fed rate hike in the near term.

At the close of trading at the secondary market last Friday, the 91-day Treasury bill (T-bill) rose the most ( by 54.19 bps) to fetch

2.6650%. This was followed by the 182-day T-bill, which increased by 28.02 bps to fetch 2.9463%, while the 364-day paper fell 11.14 bps to 2.8351%.

At the belly, yields on the two-, three-, four-, and five-year Treasury bonds (T-Bond) went down by 2.12 bps ( to 4.4571%), 14.16 bps ( to 3.9507%), 2.68 bps ( to 4.1249%) and 3.78 bps (4.2387%), respectively. The yield on the seven-year debt paper, however, rose 6.50 bps to 4.9911%.

At the long end of the curve, the 10-year fell 12.68 bps to 5.0350%, while the 20- year T- bond increased by 7.48 bps to 5.1472%.

T-bond offerings next quarter will have longer tenors of seven-, 10- and 20-year maturities.

Going forward, yields could stay range- bound to slightly higher as market participants and end-clients take their cue from the May 5 report, as well as from the results of the new 20-year fixed rate Treasury note, Security Bank’s Ms. Dulay said.

Landbank’s Mr. Dumalagan agreed, saying GS yields might rise because of the US reports on jobs and inflation. Upbeat US data might increase the odds of a June Fed rate hike.

A win by pro-European Union candidate Emmanuel Macron in France’s presidential election could also be bullish for bonds, but any deviation from these expectations might reverse the projected weekly trend in GS yields.