Yields on government debt mixed on Fed debate, ECB

LOCAL DEBT YIELD performance was mixed last week, with recent developments in the US and Europe continuing to influence government securities (GS) trading.

GS yields dropped by 7.22 basis points ( bps) on average week on week, according to the data from the Philippine Dealing and Exchange ( PDEx) as of Oct. 27.

“Local bonds tracked the move of US Treasuries throughout the week with investors also watching crude oil prices and prospects for domestic inflation,” a bond trader said.

For Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines (UnionBank), yield movements were dictated by continued concerns on who will take over the US Federal Reserve chairmanship and the anticipated tax cut plan from the US House of Representatives.

“[Last] week saw a lot of mixed movements amid lack of fresh leads. Cautiousness continued throughout [the] week due to the anticipated tax cuts plan from the US House and the nomination of a probable hawkish candidate by [President] Donald [J.] Trump to be the next Fed chair,” Mr. Asuncion said in an e-mail.

Meanwhile, Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (LandBank), said local yields fell during the week as rates corrected after the previous trading week’s jump. He also pointed to the latest move of the European Central Bank (ECB), which the market mostly interpreted as dovish in tone.

The ECB kept its key rates unchanged as well as its pace of quantitative easing at €60 billion until the end of the year. However, it also announced halving its bond buying by half to € 30 billion starting January next year but did not leave a definitive end date of its asset purchase program.

On the other side of the Atlantic, the market is watching out for Mr. Trump’s decision on Fed

Chair Janet L. Yellen’s replacement. Ms. Yellen, who was appointed into the position in 2014, is set to end her term in April of next year.

Meanwhile, the US administration is also looking to pass its tax plan, billed as “the biggest tax cut in history” in an attempt to stimulate spending in the US economy.

“There was also some caution ahead of the third-quarter growth report of the US,” Mr. Dumalagan said.

At the secondary market last Friday, the yield on the 91- day Treasury bill ( Tbill) plunged by 36.27 bps to 2.0748%. The three-year paper also decreased by 33.25 bps (3.7779%), while 182-day and five-year papers also went down by 27.20 bps (2.4869%) and 25.04 bps (4.4%) respectively.

On the other hand, 10-year paper’s rate posted the biggest increase at it gained 14.57 bps (4.7888%), followed closely by the sevenyear paper, whose yield rose by 12.53 bps (4.8621%).

Yields on the two-year and four-year papers both went up by 10.5 bps to fetch 3.9496% and 4.6321%, respectively.

The 364- day T- bill also saw its yield climb 1.37 bps to end at 2.8648%, while the rate of the 20-year paper was almost flat at 5.1445%.

Economists and bond traders expect the continued effect of international affairs in the local market in the week ahead.

The bond trader noted, “[This] week, market will react to the third-quarter US gross domestic product (GDP).”

The trader added that the shortened trading week will keep local bond players at the sidelines. “Whatever happened on the US data front, it will still have an effect in the local market.”

UnionBank’s Mr. Asuncion said this week “may see a more active market as external uncertainties become clearer.”

US gross domestic product increased at a 3% annual rate in the July- September period, also supported by strong business spending on equipment, the US Commerce Department said on Friday. —