Yields mixed after Yellen

YIELDS on government securities (GS) ended mixed last week following dovish comments from US Federal Reserve Chair Janet L. Yellen and upbeat data from the world’s largest economy.

On average, GS yields went up by 11.02 basis points ( bps), data from the Philippine Dealing & Exchange Corp. as of July 14 showed.

“GS yields generally rose [ last] week due to increased chances of another US rate hike this year after the US non-farm payrolls report beat market expectations,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines ( Landbank).

“The faster-than-expected increase in US producer prices also pushed yields higher by further reinforcing views of more US rate adjustments ahead,” he added.

Union Bank of the Philippines ( Unionbank) chief economist Ruben Carlo O. Asuncion said: “Markets were generally up [ last] week because of the US Fed’s dovish tone about raising rates.”

US job growth surged more than expected in June and employers increased hours for workers, signs of labor market strength that could keep the Fed on course for a third interest rate hike this year despite sluggish wage gains.

Non-farm payrolls jumped by 222,000 jobs last month, driven by hefty gains in health care, government, restaurants and professional and business services sectors, the US Labor Department reported last July 7.

Meanwhile, the US economy is healthy enough for the Fed to raise rates and begin winding down its massive bond portfolio, though low inflation and a low neutral rate may leave the central bank with diminished leeway, Ms. Yellen said last Wednesday.

In what may be one of her last appearances before Congress, Ms. Yellen depicted an economy that, while growing slowly, continued to add jobs, benefited from steady household consumption and a recent jump in business investment, and was now being supported by stronger economic conditions abroad.

The Fed “continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time,” Ms. Yellen said in her prepared testimony.

Reductions in the Fed’s portfolio of more than $4 trillion in securities are likely to begin “this year,” she said.

But she also noted that given current estimates, the federal funds rate “would not have to rise all that much further” to reach a neutral level that neither encourages nor discourages economic activity.

The Fed still feels the economy needs loose, or accommodative, monetary policy, so a lower neutral rate means the Fed may feel compelled to slow the pace of rate hikes down the road.

At the secondary market on Friday, in the short end of the curve, the 91- day Treasury bill (T-bill) gained 67.83 bps to yield 2.8264% while rates of the 182and 364-day papers shed 2.04 bps and 35.69 bps, respectively, to end at 2.9929% and 2.8699%.

In the belly, yields on the two-, four-, and seven- year Treasury bonds (T-bonds) went up by 6.4 bps ( 3.7786%), 35.84 bps ( 4.5018%) and 4.57 bps (4.8582%), respectively. On the other hand, rates of the three-, and five-year bonds declined by 7.89 bps (3.9513%) and 29.48 bps (4.2091%).

In the long end, the 10-, and 20-year bonds saw their yields increase by 35.07 bps and 35.62 bps to 5.05% and 5.4732%.

For this week, Landbank’s Mr. Dumalagan said: “GS yields might move sideways [this] week, still with an upward bias, due to expectations of stronger US data on housing and retail sales as well as likely hawkish comments from the European Central Bank during their monetary policy meeting [this] week. “

“[This] week would be a continuation of [ last] week’s rally,” said Unionbank’s Mr. Asuncion. —