Yields on government debt end mixed

YIELDS on government securities (GS) traded in the secondary market ended mostly mixed last week, driven by auction results and movements in US Treasury rates.

Bond yields, which move opposite to prices, grew by 0.63 basis point (bp) on average week on week, based on PHP Bloomberg Valuation Service Reference Rates data as of Jan. 19 published on the Philippine Dealing System’s website.

Rates were mixed across all GS tenors last week. Yields on the 91-,182- day, and 364-day Treasury bills (T-bills) rose by 2.17 bps, 6.99 bps and 2.57 bps to 5.3587%, 5.6655% and 5.9991%, respectively.

In contrast, the belly of the curve went down as yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) fell by 1.55 bps (to 5.8914%), 2.79 bps (5.94%), 3.41 bps (5.9896%), 3.67 bps (6.0389%), and 3.92 bps (6.127%), respectively.

At the long end, the 20- and 25-year debt papers saw their yields increase by 6.46 bps (to 6.311%) and 6.11 bps (6.3106%), respectively, while the 10-year debt paper decreased by 2.07 bps to fetch 6.2186%.

Total GS volume traded fell to P12.43 billion on Friday from P16.5 billion a week earlier.

Last week’s auction of seven-year bonds affected GS yields movements, Alessandra P. Araullo, chief investment officer at ATRAM Trust Corp said in a Viber message.

“The new seven-year issuance cleared at 6.125% coupon with strong demand, reaching up to 3.57 times [bid-to-cover ratio]… On a weekly basis, yields on the belly of the curve outperformed after gaining 5-7 basis points (bps) as buying momentum strengthened on the back of a strong auction,” Ms. Araullo said.

The Bureau of the Treasury (BTr) raised P30 billion as planned via the new seven-year bonds it auctioned off on Tuesday, as bids reached P107.095 billion, or more than three times the offer.

The bonds were awarded at a coupon rate of 6.125%. Accepted yields ranged from 6% to 6.125% for an average rate of 6.094%.

To accommodate the strong demand, the BTr opened its tap facility to raise P5 billion more via the bonds.

“During the final trading day of the week, the BTr announced their jumbo issuance targeted this quarter. Upon the announcement, we saw yields inch higher by 2-7 bps from the belly to the long end. At the same time, investors became defensive as offer levels grew wider by 5-8 bps across the curve,” Ms. Araullo added.

“With the recent local developments, we saw investors on their defensive stance as the market levels grew wider across the curve. At the same time, traded volume remains relatively light in the local bond space as flows are mostly from servicing client requirements,” she said.

The government is targeting to offer retail bonds this quarter, newly appointed Finance Secretary Ralph G. Recto said on Friday.

“The local GS market traced global yields, in particular US bond yield movements, given lack of news catalysts domestically [last] week. Peso bond yields were initially lower by 10-15 bps at the start of the week as US Treasury yields edged down, reacting to soft PPI (producer price index) and influenced successful T-bills and seven-year T-bonds auctions here, whose results came out on the low side of the indicative ranges,” Noel S. Reyes, chief investment officer for Trust and Asset Management Group at Security Bank Corp., said in a Viber message.

“By midweek, US bond yields began to correct on growing belief that the Federal Reserve may have to cut rates later than sooner (beyond March) after economic numbers released affirmed a much later need to pivot. As the Bangko Sentral ng Pilipinas can only move to cut also when the Fed does, GS traded rangebound with bouts of profit taking and consolidation giving back yields by about 8-10 bps by the end of the week,” he added.

Financial markets have priced in a 46.2% probability that the central bank will cut the Fed funds target rate by 25 basis points in March, according to CME’s FedWatch tool, Reuters reported.

For this week, the BTr’s offer of P30 billion fresh 10-year T-bonds on Tuesday will affect GS yield movements as this will “gauge the market’s appetite for long duration bonds,” Ms. Araullo said.

“Moreover, this will be the longest tenor for the month before we approach the CPI (consumer price index) print in the next two weeks. Market players positioning will reflect inflation data expectations,” she said.

January Philippine CPI data will be released on Feb. 6.

A bond trader likewise said inflation bets could affect GS yields, with rates for longer tenors expected to continue moving up.

“Market will continue to monitor the BTr’s awarding behavior and so as investors demand for bonds in the upcoming auctions, especially as the government plans to borrow via retail Treasury bonds in the first quarter,” the bond trader said in a Viber message.

US data and the release of US and Philippine gross domestic product reports this week will influence the movement of local GS rates, Mr. Reyes added.

“Additionally, the 10-year auction could also affect market direction, depending on how players absorb the supply. All told, any correction in bond yields should be an opportunity to add on to the portfolios given that the issue this year will just be a matter of when and how much to cut given that rate hikes are behind us,” he said. — A.M.P. Yraola with Reuters