Yields on gov’t debt climb as Fed fires off 75-bp hike

By Lourdes O. Pilar, Researcher

YIELDS on government securities (GS) climbed last week after the US Federal Reserve fired off its biggest rate hike in nearly three decades to contain surging inflation.

GS bond prices dropped as yields edged up by an average of 7.88 basis points (bps) week on week, based on PHP Bloomberg Valuation Service Reference Rates as of June 17 published on the Philippine Dealing System’s website.

“Local bond yields have yet to peak and have continued to drift higher as market remains defensive over supply pressure and anticipated aggressive rate hikes from Fed and BSP (Bangko Sentral ng Pilipinas),” First Metro Asset Management, Inc. (FAMI) said in a Viber message on Friday.

It added that inflation pressures still haunt the market, especially with the recent rebound in oil prices and “drastic” movements in the foreign exchange rate.

“With the Fed doing outsized rate hikes, local bond yields are likely to be strained as spread premium over US Treasury counterparts would narrow,” FAMI said.

It also added GS are prone to selloff from offshore players given the further depreciation of peso against the dollar.

“The local bond market had a full plate this past trading week but mostly due to external developments,” a bond trader said in a Viber message on Friday.

The bond trader said it started with May inflation in the US accelerated to a 40-and-a-half-year high of 8.6% year on year amid soaring fuel and food prices.

“This development had market reassess its US Fed hike projection to 75 bps from 50 bps,” the bond trader said. “Consequently, GS yields soared [last] week as market players scrambled to price in steeper rate hikes by the US Fed in the months to come.”

The US Fed raised last week its interest rates by 75 bps, the largest increase since 1994, to control surging inflation, Reuters reported.

Local GS yields increased across the curve week on week on Friday except those at the long end as the rates of the 20- and 25-year papers declined by 23.27 bps and 25.80 bps, respectively, to 6.5166% and 6.4974%.

The rates at the short end of the curve went up, with the rates of the 91-, 182- and 364-day Treasury bills increasing by 8.42 bps, 5.81 bps, and 9.43 bps, respectively, to 1.5705%, 1.9366%, and 2.2014%.

At the belly, the two-, three-, four-, five-, and seven-year Treasury bonds saw their yields climb by 13.10 bps (to 4.3338%), 17.16 bps (5.0875%), 19.26 bps (5.6754%), 21.11 bps (6.1167%), and 21.11 bps (6.6617%), respectively.

Likewise, the 10-year debt jumped by 20.40 bps week on week to fetch 6.9816%.

GS volume traded narrowed to P4.302 billion on Friday from P6.112 billion on June 10.

“Locally, there’s not much supply on the 20- and 25-year space and consequently helped push their respective benchmark yields lower,” said the bond trader.

The decline seen at the long end of the yield curve is “possibly temporary,” FAMI said, attributing lower movement to “growing recession risks for US and likely slowdown for our local economy as central banks pose to suppress demand with their fight with inflation.”

All eyes will be on the BSP’s Monetary Board meeting on June 23, with the market betting on a more aggressive hike to rein in rising inflation expectations.

The central bank had said it will likely raise the local interest rates at its next two meetings starting June to address soaring inflation.

However, the incoming BSP chief and current Monetary Board member Felipe M. Medalla signaled last week that the pace of the next rate hikes will be gradual, ruling out rate hikes higher than 25 bps. Mr. Medalla made the remarks ahead of the Fed’s decision.

The central bank fired off its first interest rate hike since 2018 in May, raising borrowing costs by 25 bps.

Domestic consumer price increases breached the central bank’s 2-4% inflation target for the second straight month in May at 5.4% amid rising food and fuel costs. The BSP expects inflation to average 4.6% this year.

“We are convinced that the BSP should also raise more aggressively (+50 bps) this June meeting as inflation path could get stickier given the wage increases, higher-for-longer oil prices and sustained peso depreciation,” FAMI said. “The BSP is also faced with Fed’s more advanced hike cycle.”

“Trading volume will remain light and yields will likely be biased to move higher on elevated US Treasuries given aggressive US Fed rate hikes ahead and local supply pressure,” FAMI said.

“Given the current risk backdrop, investors will remain opportunistic with nimble trading positions,” it added.

The bond trader also expects the BSP to hike interest rates by 50 bps this Thursday.

“GS market will continue to be cautious which will cause yields to move higher for the week,” the trader said.