Peso GS Weekly: Go for short-term peso GS

WHAT HAPPENED LAST WEEK

Good demand was seen in medium to long-term peso government securities (GS), causing the local yield curve to significantly flatten, i.e., the recent fall in long-term peso yields and the rise in short-term yields.

The rally started after the Bureau of the Treasury (BTr) fully awarded the issuance of 7-year Fixed Rate Treasury Note (FXTN) 7-69 at a high of 6.06%, setting the coupon of the bond at 6.00%. Auction results showed strong participation as highlighted by the 2.47x bid-to-cover ratio.

Later in the week, the BTr announced its borrowing schedule for the month of May, saying that it would issue 6-, 7-, 9-, and 13-year tenor buckets for the month. The exclusion of a 20-year bond to be issued for the second straight month improved the appetite for longer tenors. FXTN 20-25 traded lower by 16.5 basis points (bps) for the week as it closed at a yield of 6.260%, whereas FXTN 25-7 ended the week at 6.165% or 7.5 bps lower.

To close the week, as dealers and end-user clients continued to load up on long-dated bonds, the yield curve further flattened due to the ample supply of short-term bonds being sold in the market. This caused the Retail Treasury Bond (RTB) 5-12 with a tenor of less than a year to trade at the 6.175%-level vs FXTN 20-25 at 6.260%.

Market Levels (week-on-week)

WHAT WE CAN EXPECT

We expect good demand on the 6-year FXTN 10-64 auction, especially on the higher-end of market indications as we continue to see healthy buying demand to come out this week, just after the success of the FXTN 7-69 auction last week.

Given the significant flattening of the yield curve, we see decent value in holding short-term Treasury bills (T-bills) combined with bonds with tenors of less than one year due to their relative value as compared to long-term peso GS. RTB 5-12 is now yielding higher at 6.175% than FXTN 20-25 trading at 6.260%.

Other than the auction, investors and dealers will look at this Friday’s local inflation print for a longer-term view, where the Bangko Sentral ng Pilipinas’ (BSP) latest estimate stands at 6.3-7.1%. The Bloomberg consensus, on the other hand, is expecting inflation to be at the higher end of that range with a consensus of 7.0%.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, astronomy, and Korean pop music.