Yields on government debt drop on hopes of smaller Fed increases

YIELDS on government securities (GS) declined last week to track global bond rates that also dropped amid recession fears and hopes of smaller hikes from the US Federal Reserve.

Debt yields, which move opposite to prices, fell by an average of 10.79 basis points (bps) at the secondary market week on week, based on PHP Bloomberg Valuation Service Reference Rates data as of Dec. 9 published on the Philippine Dealing System’s website.

Last week’s trading session saw yields on Treasury bills (T-bills) end mixed, while those on Treasury bonds (T-bonds) decreased across the board.

Yields on the 182- and 364-day T-bills dropped by 3.29 bps and 11.57 bps to 4.8147% and 5.1257%, respectively. Meanwhile, the rate of the 91-day paper climbed by 1.53 bps to 4.1601%.

At the belly of the curve, rates of the two-, three-, four-, five-, and seven-year T-bonds declined by 3.92 bps (to 5.8756%), 8.69 bps (6.1568%), 11.59 bps (6.334%), 12.32 bps (6.465%) and 11.39 bps (6.6615%), respectively.

Likewise, the long end of the curve fell as yields on the 10-, 20-, and 25-year debt papers went down by 12.92 bps (to 6.8684%), 22.61 bps (7.2233%), and 21.94 bps (7.1814%), respectively.

Total GS volume reached P11.147 billion on Friday, higher than the P10.303 billion recorded on Dec. 2.

“Local bond yields tracked the movement in global bond markets with sentiment improving,” ING Bank Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

He added that market players are pricing in slower rate hikes from the Fed.

“Capping the rally was the higher-than-expected inflation report showing inflation hit 8%,” Mr. Mapa said.

The bond trader attributed local yield movements last week to the decline in US Treasury yields amid recession fears and after the Bureau of the Treasury (BTr) scrapped its last two auctions for the year.

“The BTr canceled remaining auctions even as schedule was already light to begin with, and this decision was made even if there were bond maturities that can be tapped,” the bond trader said in a Viber message.

For most of last week, yields on US Treasuries slumped, with the two-year yield, which reflects interest rate expectations, at 4.2838% as of Thursday, away from its 15-year high of nearly 4.9% hit last month, Reuters reported.

A closely watched part of the US Treasury yield curve, the gap between yields on two- and 10-year Treasury notes was inverted at -83 bps. An inversion of this yield curve is typically a precursor to recession.

However, on Friday, Treasury yields rose after data on US producer prices stirred hopes of moderating inflation but also fears the Fed will need to keep rates higher for longer.

The benchmark 10-year yield went up 10.2 bps to 3.595% and the two-year note rose 3.2 bps to 4.344% on Friday.

The yield curve measuring the gap between yields on two- and 10-year notes was at -75.5 bps.

The producer price index (PPI) for final demand rose 0.3% last month and increased 7.4% annually, while the PPI for October was revised up to 0.3% from 0.2% as previously reported, the US Labor department said.

Fed policy makers are now expected to raise rates by 50 bps at their Dec. 13-14 meeting to a range of 4.25% to 4.5% following four straight 75-bp hikes.

The Fed has hiked borrowing costs by 375 bps since March.

Meanwhile, back home, headline inflation was at a 14-year high of 8% in November, breaching the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target for 2022 for an eighth straight month.

Inflation averaged 5.6% in the eleven months to November, faster than the 4% print recorded in the same period last year.

The BSP has raised benchmark interest rates by 300 bps since May and is seen to continue tightening at its Dec. 15 review.

For this week, the bond trader said there may be profit taking ahead of the BSP’s policy meeting, where the market also widely expects a 50-bp hike.

Mr. Mapa likewise said the market will its cue from the policy reviews of the Fed and the BSP.

“Although both central banks are widely expected to hike by 50 bps, sentiment will likely be swayed by comments after each meeting,” he said. — A.M.P. Yraola with Reuters