Yields on government securities steady ahead of Fed

By Christine J.S. Castañeda,
Researcher

YIELDS on government securities (GS) traded in the secondary market were flat last week amid anticipation of a Federal Reserve rate hike, US tax reform developments and the government’s retail Treasury bond offer results.

GS yields — which move opposite to prices — were down by 6.63 basis points (bps) on average week on week, data from the Philippine Dealing & Exchange Corp. as of Dec. 8 showed.

Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (Landbank) said: “Yields fell [last] week following a correction in the market after last week’s rise. The drop occurred even as investors continue to anticipate another US rate hike next week and despite positive developments on the US tax reform.”

Carlyn Therese X. Dulay, vice-president and head of institutional sales at Security Bank Corp., said the Dec. 4 settlement of the retail Treasury bonds (RTB) affected GS yields last week.

“The large float temporarily caused some upward pressure on tight liquidity post settlement, along with mixed US data and optimism on the US tax legislation which was also reflected in the recent TDF (term deposit facility) auction, which had marginally lower tenders,” she said.

A bond trader also attributed last week’s yield movement to “liquidity tightening because of the settlement of the new RTBs.”

The bond trader also noted the undersubscribed offerings for the Treasury and the term deposit facility by the Bangko Sentral ng Pilipinas because “most of the money — the excess liquidity — were settled in the RTBs.”

With a 51-49 result, Senate Republicans approved the bill which would slash corporate taxes to 20% from the current 35%. This would be the largest change to US taxation since the 1980s.

Meanwhile, the government raised P255.4 billion from its offer of RTBs. The Treasury said “strong public demand led the RTBs to be oversubscribed multiple times.”

The government set the initial offer at P30 billion. The Treasury issued P130 billion in RTBs during the auction, while P125.4-billion worth was issued during the Nov. 20-27 offer period.

At the secondary market on Friday, in the short end of the curve, yields on the 91-, and 182-day Treasury bills (T-bills) went up by 11.86 bps and 10.71 bps to 3.1554% and 3.2839%. Meanwhile, the rate of the 364-day paper lost 30.22 bps to 3.1285%.

In the belly, yields on the two-, three-, and four-year Treasury bonds (T-bonds) increased by 10.55 bps (4.0745%), 8.96 bps (4.35%) and 9.25 bps (4.9371%), respectively. Meanwhile, yields on the five-, and seven-year T-bonds were down by 41.05 bps and 9.15 bps to 4.732% and 5.3464%.

In the long end, the 10-, and 20-year T-bonds saw their bonds decrease by 12.39 bps and 24.80 bps to 5.58% and 5.6074%.

For this week, Landbank’s Mr. Dumalagan said: “[Y]ields might recover amid likely hawkish moves or guidance from the US [Federal Reserve] and the ECB (European Central Bank) as well as possibly stronger US data on inflation and retail sales.”

For her part, Security Bank’s Ms. Dulay said on Friday: “Expect market to trade within range in the coming week ahead of the [non-farm payrolls] figure due out Dec. 8 with expectations at 195,000, as well as ahead of next week’s [Federal Reserve] decision.”

Non-farm payrolls rose by 228,000 jobs in November while unemployment rate was unchanged at 4.1%, the US Bureau of Labor Statistics reported last Friday.

The bond trader said: “Probably we see yields move sideways with an upward bias probably due to less liquidity in the market, when the year is about to end, banks tend to hold on to their liquidity so we’ll see probably another cautious week ahead of the FOMC (Federal Open Market Committee) meeting.”