Yields on government debt end flat ahead of RRR cuts

YIELDS ON government securities (GS) ended flat last week on expectations of another cut on banks’ reserve requirement ratios (RRR) and as inflation slows further.

On average, GS yields, which move opposite to prices, dropped by one basis point (bp) week-on-week, based on the

PHP Bloomberg Valuation Service Reference Rates as of Oct. 11 as published on the Philippine Dealing System’s Web site.

Jose Miguel B. Liboro, head of fixed income at ATRAM Trust Corp., said rates of debt papers ended mixed on the back of easing inflation and expectations that prices will “gradually move higher moving into 2020.”

At the short end of the curve, securities continued to receive demand and benefited from additional liquidity as the market expects further reductions in banks’ reserve ratios, Mr. Liboro said.

“The yield curve has continued to steepen; yields on short tenor securities have consistent demand and have seen an increase in interest due to expectations of additional cuts to the reserve requirement rate. Short-tenor securities tend to benefit from the additional liquidity,” Mr. Liboro said in an email over the weekend.

Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, Inc. said in an email that yields remained on a downward trend following “positive news” abroad.

“It is probable that investors are taking profit, but some are still taking a longer view. It seems that the trend is still a decline

with more positive news from external trade issues. Note that there were many external trade related news last week aside from the optimism because of the trade conflict,” Mr. Asuncion said.

Inflation slowed to 0.9% in September amid lower food and electricity costs, the Philippine Statistics Authority reported earlier this month.

Prices of widely-used goods and services in September further cooled from 1.7% in August due to “softer price adjustments observed in nearly all commodities and base effects, coming from 6.7% in the same period in 2018.”

The September reading was the slowest since the 0.7% logged in April 2016, but matched the 0.9% in May 2015 and May 2016.

Last month’s headline print fell at the low end of the Bangko Sentral ng Pilipinas’ (BSP) 0.6%1.4% forecast for September.

For the nine months to September, headline inflation averaged at 2.8%, well within the BSP’s 2-4% target range for 2019 but still above the full-year forecast of 2.5%.

Meanwhile, the BSP announced last month that it will reduce lenders’ RRR by another 100 bps effective November to bring the reserve requirement of universal and commercial banks to 15% from 16%. The reserve ratios of thrift banks will also be cut to five percent from the current six percent, and to three percent from four percent for rural and cooperative banks.

BSP Governor Benjamin E. Diokno last week said the central bank remains open to another round of RRR cuts within the year, but noted this will be datadependent. Meanwhile, the BSP is done cutting benchmark rates for now, he said.

Meanwhile, ATRAM Trust’s Mr. Liboro said the yields on longer tenors rose as investors became more cautious due to upticks in global bond yields.

“Additionally, the uptick in global bond yields has also prompted investors to be more cautious — longer-tenor securities have adjusted higher on the back of this,” he said.

The US Federal Reserve’s preferred measure of the yield curve on Friday uninverted for the first time since mid-July, as progress in US-China trade talks boosted the US economic outlook.

The spread between threemonth and 10-year Treasury yields widened by the most since May 6 and moved into positive territory. It had been inverted since late May save for two intraday pops in mid-July.

US President Donald Trump said on Friday the United States and China had come to a substantial phase-1 trade deal, reaching agreement on intellectual property, financial services and big agricultural purchases.

The two sides are very close to ending their trade war and it will take up to five weeks to get the deal written, Mr. Trump said, speaking to reporters after talks with Chinese Vice Premier Liu He.

At the secondary market on Friday, the 91-day Treasury bill edged down by 0.1 bp to yield 3.064%. Rates of the 182- and 364-day papers also went down by 0.3 bp and 4.8 bps to 3.237% and 3.616%, respectively.

Meanwhile, rates of the two, three- and four-year Treasury bonds (T-bonds) went up by 0.2 bp, 0.2 bp and 0.1 bps to 3.961%, 4.106% and 4.245%, respectively. The yield on the five-year debt papers inched up by 0.4 bp to 4.379% while the rate of the seven-year papers declined by 2 bps 4.581%.

For the 10-, 20- and 25-year T-bonds, rates went down by 1.5 bps, 0.4 bp and 0.6 bp to 4.782%, 5.072% and 5.058%, respectively.

For this week, Mr. Liboro sees a “consolidation with an upward bias,” adding that “while prospects for local fixed income remain positive over the medium term, much of this positivity has been priced in at current levels.

“Some profit taking moving towards year-end given the risk of higher global bond yields and a gradual move higher in inflation after October seems likely,” he said. —