Yields on government debt climb as US Fed keeps hawkish stance

By Abigail Marie P. Yraola, Researcher

YIELDS on government securities traded at the secondary market rose last week after the hawkish stance of the US Federal Reserve even as it kept interest rates unchanged.

Yields, which move opposite prices, rose by 9.17 basis points (bps) on average week on week, based on PHP Bloomberg Valuation Service Reference Rates as of June 16 posted on the Philippine Dealing System website.

Rates went up at the short end of the curve with the 91-, 182- and 364-day Treasury bills (T-bills) rising by 3.1 bps, 12.88 bps and 9.73 bps to 5.8941%, 6.0297% and 6.0455%, respectively.

The belly of the curve climbed as yields on the two-, three-, four-, five- and seven-year Treasury bonds (T-bonds) went up by 4.6 bps (5.9470%), 5.33 bps (5.8961%), 5.5 bps (5.8706%), 6.2 bps (5.8747%) and 10.85 bps (5.9604%), respectively.

At the long end of the curve, the rates of the 10-, 20- and 25-year debt also increased by 16.63 bps (6.0753%), 12.41 bps (6.0678%) and 13.66 bps (6.0691%). Volume fell to P5.3 billion from P8.07 billion a week earlier.

Noel S. Reyes, chief investment officer for Trust and Asset Management Group at Security Bank Corp., said the main factors for the week’s yield movements were externally driven, primarily by US Treasuries.

“The Philippine bond market chose to trade defensively throughout the week as direction was being dictated by US interest rate trading and Fed policy,” he said.

The US central bank’s decision to pause and signal future hikes kept peso bond buyers on hold because it puts pressure on the Bangko Sentral ng Pilipinas to raise rates as well to maintain its premium and protect the peso, Mr. Reyes said.

A bond trader said local yields had tilted to the upside amid initial expectations of policy rate hike by the Fed.

“While the US central bank kept its policy rates unchanged, the latest economic projections from Fed officials hinted at tighter monetary policy setting compared with prior market views,” the bond trader said in a Viber message.

Last week, the Federal Reserve kept interest rates unchanged but signaled that borrowing costs could rise by as much as half-a-percentage point by yearend amid a strong US economy and a slower decline in inflation, Reuters reported.

Traders’ expectations for peak rates moved higher after the announcement.

“We may see yields continue to move higher, especially with Finance Secretary Benjamin E. Diokno saying the BSP might cut rates in the first quarter of 2024, which is contrary to last month’s statement that they might be able to cut in August,” another bond trader said in a Viber message.

The first bond trader said a July rate hike by the Fed is possible. The trader said volume had been subdued as traders have chosen to remain on the sidelines before the Fed meeting.

Mr. Reyes said there could be renewed buying at this week’s trading session if yields move up.

“The downward trajectory of inflation will eventually lead to the attainment of the terminal rate sooner than later and peaking of rates is at hand,” he said.

The first bond trader expects yields to move higher due to hawkish statements by the Fed.

“The BSP is expected to track the Federal Reserve in potentially maintaining its policy rates while remaining relatively hawkish in order to give the domestic central bank some flexibility to allow for future rate hikes,” the trader said.

The Monetary Board will hold its policy meeting on June 22.