Yields on gov’t debt drop ahead of Fed policy meet

YIELDS on government securities (GS) went down last week amid muted trading and bargain hunting as investors took leads from the movement of US treasuries and ahead of the US Federal Reserve’s policy meeting.

GS yields at the secondary market fell by an average of 13.42 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates of Jan. 27 published on the Philippine Dealing System’s website.

Rates went down across all tenors except for 91-day Treasury bill (T-bill), which saw its yield rise by 6.37 bps to 4.3757%.

Meanwhile, the 182- and 364-day T-bills declined by 4.42 bps and 5.84 bps to yield 4.9535% and 5.3947%, respectively.

At the belly of the curve, yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) also went down by 19.94 bps (5.319%), 22.13 bps (5.5344%), 20.59 bps (5.6824%), 18.47 bps (5.7853%), and 18.26 bps (5.9061%), respectively.

At the long end, the rates of the 10-, 20-, and 25-year debt papers dropped 19.25 bps (to 6.0271%), 15.24 bps (6.4126%), and 9.88 bps (6.4166%), respectively.

Total GS volume traded amounted PHP 8.53 billion on Friday from the PHP 13.84 billion recorded on Jan. 20.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an e-mail that trading at the secondary market was mostly muted on Friday, with most players staying on the sidelines as bargain hunting was already exhausted the past few days.

“Prices widened throughout the day as investors also await the US Federal Reserve policy rate decision and the 13-year FXTN (fixed-rate Treasury note) 25-7 auction next week. The 10-year to 13-year area was flat from the previous session, while the benchmark 20-year bond was last dealt at 7 bps higher to 6.425%. Lastly, early indications for next week’s 13-year auction are at 6.10%-6.2%,” Mr. Asuncion said on Friday.

Fed Governor Christopher J. Waller earlier said he supports a 25-bp rate increase at the Federal Open Market Committee’s (FOMC) first policy meeting for this year scheduled on Jan. 31 to Feb. 1.

The US central bank hiked its federal funds rate by 50 bps in December to a 4.25%-4.5% range following four straight 75-bp increases. This brought cumulative hikes in 2022 to 425 bps.

“Local bond yields tracked the movement of global bond yields, most notably that of US Treasuries. Expectations point to an eventual reversal in policy stance from the US Fed, which traders appear to be focusing on more than the likelihood of rate hikes in the first half of the year,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

Mr. Mapa said the Philippine gross domestic product (GDP) data released last week did not affect yields as the market was focused on the Fed’s next policy move, which investors expect the Bangko Sentral ng Pilipinas to also take its cue from for its own review next month.

US Treasury yields rose amid economic output data beat expectations, Reuters reported. The yield on 10-year US bonds, a key global benchmark interest rate, rose over 2 bps after the data and were last seen at 3.511%. The two-year note yields, which tend to more closely reflect monetary policy expectations, rose nearly 3 bps and were last seen at about 4.18%.

This came after the US GDP rose by 2.9% year on year in the fourth quarter, slower than the 3.2% pace in the third quarter. For 2022, US economy expanded 2.1%, lower from the 5.9% recorded in 2021.

Back home, preliminary data from the Philippine Statistics Authority showed Philippine GDP expanded by 7.2% year on year in the fourth quarter of 2022, bringing the full-year expansion to 7.6%. This was better than the 7.5% estimate by economists in a BusinessWorld poll.

The country’s 2022 economic performance was above the government’s 6.5-7.5% goal and was faster than the 5.7% growth in 2021. It was also the quickest annual growth since the 8.8% seen in 1976, the government data said.

For this week, Mr. Mapa said the movement of US Treasuries will continue to affect the local market.

Mr. Asuncion said investors will take their lead from the country’s economic and inflation outlook.

“Against this backdrop of a Philippine GDP outlook cooling off, subsequent easing of local inflation, and a 10-year US Treasury rate headed south of 3.5%, investors should continue to participate in the Bureau of the Treasury’s auction of the long bonds,” he said. — L.O. Pilar with Reuters