Upward trend for IOU rates seen
From last week’s auction results amid strong demand and liquidity, we sensed looming upside for duration yields starting with the belly of the curve
Secondary market rates for security papers might inch a bit higher for the week, following the national government’s (NG) lower budget deficit as disclosed by the Bureau of Treasury (BTr) week-ago.
Rizal Commercial Banking Corp. chief economist Michael Ricafort explained that the lower spending and income of the NG signals that it could borrow more from domestic sources given its announced preference for such over foreign loans.
“Local interest rate benchmarks could go up after the latest budget deficit data still signals the need for more local borrowings by the government to finance the budget deficit amid the continued yearon-year decline in tax revenues due to COVID-19,” Ricafort said in a text message.
“More BSP (Bangko Sentral ng Pi l ipinas) lending limit to the NG to about P850 billion under the Bayanihan 2 Law, from the current P540 billion since October 2020, would require more peso funds to be siphoned off to partly finance this,” he added.
According to Ricafort, the expected uptick on pesodenominated debt papers could rise by 0.05 to 0.10 percent, similar to the recent increase in the United States (US) government-issued 10-year bond.
Still, the economist said that positive economic prospects, stemming from improvement in COVID-19 cases, could lead to some upward correction from the unusually low yields.
The scrapping of Samurai and Panda bond sales from the BTr’s borrowing program for the year likewise placed a stronger case for further domestic borrowings, Ricafort said.
Yields for government-issued IOU as well as those from the private sector manifested a downward trend and continues to do so, as the market continues to price in the BSP’s position to keep its rates low owing to a benign inflation environment.
Union Bank of the Philippines chief economist Carlo Asuncion shared the same sentiment as he pencilled the five- and 10-year benchmark to range between 2.691 to 2.865 percent and 2.884 to 2.982
percent, respectively. “From last week’s auction results amid strong demand and liquidity, we sensed looming upside for duration yields starting with the belly of the curve,” Asuncion said.
“With muted threat of upside inflation risk, onshore liquidity may be taking its cue from offshore markets wherein liquidity has started its migration from a defensive portfolio headline by US treasuries and into a cyclical riskbased portfolio,” he added.
Peso strength
While at it, both economists agree that the local unit will continue to remain strong for the week ending 30 October 2020, sustaining its upward trajectory in the recent months.
Ricafort laid his projections for the peso to settle within the 48.35 to 48.60 band as he cited the recent move by the government to further re-open the local economy.