Gov’t debt yields rise on inflation, hawkish Fed

YIELDS on government securities (GS) rose last week following a slower but still elevated August inflation print and hawkish remarks from the US Federal Reserve chief.

GS yields, which move opposite to prices, went up by a week-on-week average of 24.91 basis points (bps), according to the PHP Bloomberg Valuation Service Reference Rates as of Sept. 9 published on the Philippine Dealing System’s website.

GS volume on Friday reached P12.402 billion, higher than the P10.298 billion recorded on Sept. 2.

Yields climbed nearly across the board last week, except for the 182-day Treasury bills (T-bills), which lost 3.08 bps to fetch 3.2996%.

The rates of the 91- and 364-day T-bills rose by 7.80 bps and 8.56 bps to 2.461% and 3.9767%, respectively.

The belly of the curve also went up as yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) increased by 26.42 bps (5.0490%), 29.53 bps (5.3706%), 32.35 bps (5.7004%), 33.04 bps (5.9893%) and 31.83 bps (6.3341%).

Likewise, the rates of the 10-, 20-, and 25-year papers increased by 39.14 bps (6.6309%), 34.17 bps (6.9911%) and 34.28 bps (6.984%), respectively.

“Despite the slower-than-expected inflation pace in August, market participants are still concerned about it, as the print is still elevated and far off from the government’s target inflation range of 2-4%,” a bond trader said in a Viber message.

Preliminary data from the Philippine Statistics Authority showed headline inflation eased to a two-month low of 6.3% year on year in August from the near four-year high of 6.4% in July.

Still, this was faster than the 4.4% recorded in August 2021 and marked the fifth consecutive month that inflation went above the 2-4% target of Bangko Sentral ng Pilipinas (BSP).

In the first eight months of 2022, inflation averaged 4.9%, faster than the 4% a year ago. This is still below the BSP’s 5.4% full-year inflation forecast.

The bond trader added that continued hawkish comments from the Fed chief on their commitment to increase interest rates to temper surging inflation in the United States caused local yields to climb.

“Bond investors can’t help but be defensive and refrain from aggressively building up their bond positions given the foreseen rise in interest rates in the coming months,” the bond trader said.

Fed Chief Jerome H. Powell on Thursday said the US central bank is “strongly committed” to fighting inflation.

“We need to act now, forthrightly, strongly as we have been doing, and we need to keep at it until the job is done,” Mr. Powell said in a webcast interview Cato Institute President Peter Goettler.

The Fed will hold its next policy meeting on Sept. 20-21.

Security Bank Corp. Chief Investment Officer for Trust and Asset Management Group Noel S. Reyes said in an e-mail last week that yield movements were volatile last week after Mr. Powell said in a symposium held in Jackson Hole on Aug. 26 that rates will be higher for longer, which could cause other central banks to follow suit to reduce pressure on their respective currencies. 

“Market sentiment and direction of local yields were dictated by a steepening US curve as the 10-year US bellwether breached 3.3% on Wednesday from 3.2% to start the week despite safe haven demands,” UnionBank of the Philippines, Inc. (UnionBank) said in an e-mail.

UnionBank added that the local curve has steepened in the last two weeks due to the risk of hefty supply of government securities following the recent issuance of retail Treasury bonds as well as the Bureau of the Treasury’s (BTr) weekly auctions of debt papers.

For this week, the bond trader expects yields to see some upward pressure as the Fed’s and BSP’s policy meetings near. The BSP Monetary Board will meet on Sept. 22, a day after the Fed.

“Market will continue to adopt to its defensive stance and thereby may cause yields to higher in the near-term,” the bond trader said.

UnionBank said the local market will continue to track the two-year and 10-year US bellwether rates as markets position ahead of the release of US August inflation data and other economic reports before the Federal Open Market Committee meeting.

“As government debt supply risk starts to normalize and with likelihood of Philippine inflation peaking this month, bargain hunting may show up in the steeper segment of the local curve, particularly if US Treasuries do not overreact to US inflation data,” UnionBank said. — Lourdes O. Pilar