Yields on government securities climb as Fed hints on balance sheet reduction
YIELDS on government securities (GS) inched upward last week after the Federal Reserve maintained its key policy rates, with the US central bank expecting to start trimming its massive bond holdings soon.
Week on week, bond yields increased by an average of 13.59 basis points ( bps), Philippine Dealing and Exchange Corp. data as of July 28 showed.
“The most significant happening [ last] week was the US Fed admitting that inflation has not been going the way it should and that further normalization of Fed rates will hinge upon developments in the US economy that signals that the level of prices are moving up as expected,” said Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank).
Mr. Asuncion said the Fed’s dovish tone also set the pace for yields and even for the peso-dollar exchange rate towards the end of last week.
Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines ( Landbank), agreed, saying: “GS yields increased [ last] week due to upbeat US data and hints from the US Federal Reserve of an adjustment of its balance sheet before the year ends. Domestic yields tracked the movement of US interest rates, which jumped on account of upbeat US reports on manufacturing, consumer confidence and durable goods orders.”
According to a Reuters report, the Federal Open Market Committee — the Fed’s policy-making body — said after its July 25-26 meeting that it expects to start its balance sheet normalization program and trim its US Treasury bonds and mortgage-backed securities holdings “relatively soon.”
Mr. Dumalagan noted that the rise in GS yields was tempered by increased optimism following President Rodrigo R. Duterte’s State of the Nation Address on July 24.
A bond trader interviewed late Friday said: “National government deficit numbers show the President’s resolve to increase spending, which would undoubtedly require more funding, thus more borrowings.”
The government recorded a P90.9-billion deficit in June, five times that month’s P16.7-billion program and double the year-ago P45.2 billion.
June’s shortfall took the sixmonth fiscal balance to a P154.5billion deficit, above the P143.8billion program for the period and 28% bigger than the year-ago P120.3 billion.
At the secondary market last Friday, the short end of the curve inched up as yields on 91-, 182-, and 364- day Treasury bills increased by 17.75 bps, 16.15 bps, and 0.94 bp, respectively, fetching 2.9686%, 2.9939%, and 3.0254%.
Rates at the belly ended mixed as the three-, four-, and five-year Treasury bonds (T-bonds) went up by 1.72 bps, 23.59 bps, and 50.66 bps, respectively, yielding 3.8988%, 4.3000%, and 4.6286%. Yields on the two- and the sevenyear T-bonds, however, slipped by 3.40 bps and 5.72 bps to 3.6464% and 4.8089%.
Meanwhile, as yields on the 10- and 20-year notes rose by 33.22 bps (5.0218%) and 0.94 bp (5.1720%).
Sought for an outlook, the bond trader said for this week, “We’ll see inflation numbers, and market is keenly awaiting the BSP’s (Bangko Sentral ng Pilipinas) inflation forecast, although newly minted Governor [Nestor A.] Espenilla has indicated that this practice may no longer be continued.”
Mr. Espenilla said last week that the BSP will no longer give monthly inflation forecasts.
Ten economists in a BusinessWorld poll yielded a median inflation forecast at 2.85%, which if realized will inch up from June’s 2.8% reading and from 1.9% in July 2016. The Philippine Statistics Authority will release official inflation data on Friday. Inflation averaged 3.1% in the first semester.
“GS yields are expected to move sideways with an upward bias amid likely stronger US data on ADP employment, non-manufacturing, and overall economic growth. The rise in yields might be capped by possibly softer inflation reports from the US and the Euro area,” Landbank’s Mr. Dumalagan said.
UnionBank’s Mr. Asuncion said for this week, “movements will be hinged on data that will be released about US economic growth and other related variables.”