Yields on government debt rise on inflation worries

YIELDS on government securities (GS) climbed last week amid concerns over rising inflation, which could lead to higher interest rates, analysts said.

Rates on debt traded at the secondary market rose by an average of 14.35 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Oct. 14, published on the Philippine Dealing System’s website.

Yields at the short end of the curve went up. The 91-, 182- and 364-day Treasury bills (T-bills) saw their rates rise by 18.93 bps, 36.54 bps, and 3.39 bps to 3.3704%, 4.0154%, and 3.881%, respectively.

Likewise, the belly of the curve climbed. Yields on the two-, three- four, five-, and seven-year Treasury bonds (T-bond) went up by 23.04 bps (to 5.6648%), 22.33 bps (5.9885%), 20.54 bps (6.2716%), 18.28 bps (6.5364%) and 20.42 bps (6.9505%).

On the other hand, the long end of the curve closed mixed. Yields on the 20- and 25-year debt papers fell by 10.27 bps (7.3271%) and 10.59 bps (7.329%), respectively, while the 10-year papers went up by 15.23 bps to fetch 7.2021%.

Total GS volume traded reached P3.769 billion on Friday, lower than the P4.818 billion recorded on Oct. 7.

“Main factors continue to be outlook on inflation and interest rates. Persistent inflation both in the US, EU (European Union), and here by our BSP (Bangko Sentral ng Pilipinas),” Security Bank Corp. Chief Investment Officer for Trust and Asset Management Group Noel S. Reyes said in an e-mail.

“Higher rates remain a market bias and this is evident in the flat curve, where the shorter maturities are being bid up. Worse-than-expected inflation in the US … presents a larger possibility of a 75-bp hike in the Federal Reserve’s next meeting, forcing the hand of the Bangko Sentral ng Pilipinas to also lay down at least a 50-bp hike,” Mr. Reyes said.

He added that the Bureau of the Treasury’s offerings of shorter maturities have been met with higher bid yields, pulling up secondary market rates.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said global inflation concerns continue to affect local market sentiment.

“Yields across the globe have been on the rise, with almost all markets taking their cue from developments in the US. With US inflation still surging, the Fed is threatening to hike rates aggressively in a bid to cool price pressures,” Mr. Mapa said.

“Meanwhile, locally, we are also seeing signs of broadening price pressures as second-round effects have begun to proliferate. With expectations that inflation will stay high for some time, bond yields have adjusted higher,” he added.

US consumer prices rose more than expected in September on higher rent and food costs, bolstering expectations that the Fed will fire off a fourth straight 75-bp hike next month.

The consumer price index (CPI) rose 0.4% last month after rising 0.1% in August.

In the 12 months to September, the CPI rose 8.2% from 8.3% in August, slowing for the third straight month.

The US central bank has raised rates by 300 bps since March.

Meanwhile, Philippine headline inflation picked up to its fastest pace in more than 13 years in September due to higher food costs.

The consumer price index was at 6.9% last month, up from 6.3% in August and 4.2% in the same month last year. It matched the 6.9% print in October 2018 and was the fastest since the 7.2% pace logged in February 2009.

The September print marked the sixth straight month that inflation breached the central bank’s 2-4% target for the year.

For the first nine months, headline inflation averaged 5.1%, faster than the 4% seen in the same period last year but below the BSP’s 5.6% forecast for 2022.

The BSP has raised benchmark rates by 225 bps since May.

On Thursday, BSP Governor Felipe M. Medalla said in an interview in Washington with Bloomberg Television that the central bank will consider another big rate hike in their Nov. 17 meeting to support the currency and prevent its depreciation against the dollar from further stoking inflation.

Mr. Medalla said they are looking at a 50-bp or 75-bp increase next month to help cool inflation and ease currency pressures stemming from a strong dollar amid the Fed’s hawkish stance.

For this week, Mr. Mapa said yields may continue to rise amid global inflation and rate concerns, with the BSP chief’s comments last week also expected to drive sentiment.

Meanwhile, Mr. Reyes said GS yields may move higher across the board as the curve flattens further due to rising rates on shorter tenors as well as expectations of further tightening by the Fed and the BSP. — A.M.P. Yraola