US data, tax reform developments push up yields on government debt

YIELDS on local government securities (GS) increased last week amid developments in the US government’s push for further tax cuts, as well as the release of positive economic data there.

Yields on government securities ( GS) — which move inversely to prices — rose by 15.29 basis points ( bps) on average week-on-week, data from the Philippine Dealing & Exchange Corp. (PDEx) as of Oct. 6 showed.

“GS yields rose this week due to a confluence of factors, including bullish speeches from Federal Reserve officials, expectations of a hawkish replacement for Fed Chair Yellen, developments on US tax reform, and higher-than-expected Philippine inflation,” said Guian Angelo S. Dumalagan, market economist and acting head of Treasury Support at Land Bank of the Philippines (Landbank).

For UnionBank of the Philippines ( UnionBank) Chief Economist Ruben Carlo O. Asuncion, last week’s yield movements “came from US data releases and the general upbeat sentiments about the US economy, particularly the buildup to the latest labor numbers.”

The US Labor Department announced on Friday that the country’s unemployment rate in September 2017 declined to 4.2% from August’s 4.4%. The September figure is said to be the lowest since 2001.

In the US, President Donald J. Trump and Congress hope to put in place a package of tax cuts before January with the hopes of boosting economic growth, employment and wages. In a major move last week, the Republicancontrolled House of Representatives approved a budget blueprint that would allow a future tax bill to pass Congress bypassing any opposing vote or filibustering from the opposing Democratic Party.

Separately, the US Senate Budget Committee approved its own resolution hours after the budget blueprint was passed, sending it to the Senate for a vote.

The Federal Reserve, the country’s central monetary authority, has raised concerns on this development, saying the proposed tax cuts could stoke inflation as well as increase debt to dangerous levels, tempering growth.

In the Philippines, meanwhile, analysts saw a “knee- jerk reaction” to the September inflation report which dampened sentiment. UnionBank’s Mr. Asuncion, however, noted that investors shrugged it off after the Bangko Sentral ng Pilipinas considered domestic inflation “manageable.”

Headline inflation stood at 3.4% in September, faster than August’s 3.1% and last year’s 2.3%, mostly due to rising food and oil prices.

At the secondary market, the rate of the 91-day Treasury bill (Tbill) rose the most, moving up by 80.35 bps to 2.8286%, followed by the 182-day T-bill, which gained 41.87 bps to 2.9175%. The yield on the 364-day T-bill, on the other hand, fetched 2.8530%, down by 1.44 bps.

In the belly of the yield curve, the rates of the two- and threeyear securities went up by 10 bps and 25.95 bps, respectively, to 3.8821% and 3.9246%. The yields on the four-, five-, and seven-year debt papers, however, fell 3.43 bps ( 4.5425%), 1.75 bps ( 4.6200%), and 1.04 bps (to 4.3102%), respectively.

Moreover, the yield on the 10-year Treasury bond (T-bond) went up by 3.04 bps to 4.6389%, while the yield on the 20-year T- bond fell 0.66 basis point to 5.1413%.

“GS yields might rise again next week as the FOMC (Federal Open Market Committee) minutes might continue to support views of another US rate hike in December 2017, consistent with the overall guidance from the speeches of various Federal Reserve officials this week,” Landbank’s Mr. Dumalagan said.

He added that “[e]xpectations of a pick up in US inflation might allay some concerns about weak prices in the FOMC minutes, further bolstering US rate hike bets.”

“Tax reform developments in the US and the Philippines as well as geopolitical concerns globally might continue to introduce volatility in GS yields.”

With a strong possibility that yields will continue to rise this week, Mr. Dumalagan said it “would be best to invest in short or medium dated securities to avoid large market- to- market losses.”

For UnionBank’s Mr. Asuncion, yields this week are expected to rise due to the growing perception of an improving global economy, with the International Monetary Fund ( IMF) Managing Director Christine Lagarde suggesting that there will be a likely upgrade on their outlook for global growth.

The IMF is set to announce its latest global growth forecast next week. It predicted earlier this July that global growth would hit 3.6% in 2018, the fastest since 2011. —