Debt yields drop on rate cut bets

YIELDS on government securities ended lower across all tenors last week after the Bangko Sentral ng Pilipinas (BSP) signaled that it could cut rates for a third straight time later this month.

GS yields, which move opposite to prices, declined by an average of 4.55 basis points (bps) week on week at the secondary market, based on the PHP Bloomberg Valuation Service Reference Rates as of Aug. 15 published on the Philippine Dealing System’s website.

At the short end, yields on the 91-, 182-, and 364-day Treasury bills (T‑bills) fell by 7.83 bps (to 5.2921%), 5.09 bps (5.5066%), and 0.65 bp (to 5.6592%), respectively.

At the belly of the curve, rates of the two, three-, four-, five-, and seven-year Treasury bonds (T-bonds) went down by 2.61 bps (to 5.6597%), 4.67 bps (5.7361%), 5.26 bps (5.7959%), 4.82 bps (5.8469%), and 3.88 bps (5.9254%), respectively.

Lastly, at the long end, yields on the 10-, 20-, and 25-year bonds dropped by 5.91 bps (to 6.0657%), 4.78 bps (6.4165%), and 4.52 bps (6.4170%), respectively.

GS volume traded fell to P61.1 billion on Friday from P90.84 billion on Aug 8.

“With the BSP underscoring the possibility of an August rate cut following the below-target inflation and GDP (gross domestic product) growth, market participants have been slowly driving short-term yields in anticipation of this eventuality from the local central bank,” the first bond trader said in an e-mail on Friday.

The second bond trader said in a Viber message that GS yields continued to go down as the market continued to reposition in anticipation of a BSP cut at the Monetary Board’s Aug. 28 meeting.

Philippine headline inflation sharply eased to a near six-year low of 0.9% in July, marking the fifth straight month that inflation settled below the central bank’s 2-4% annual goal.

For the first seven months of the year, inflation averaged 1.7%.

Meanwhile, the economy grew by an annual 5.5% in the second quarter, supported by a rebound in agriculture production and faster household consumption.

For the first half, GDP growth averaged 5.4%, slower than the 6.2% a year ago. The government is targeting 5.5-6.5% GDP growth this year.

BSP Governor Eli M. Remolona, Jr. said last week that a rate cut is “quite likely” at the Monetary Board’s next meeting on Aug. 28. The BSP chief also said that they are expecting to deliver only two more rate cuts this year, including the one they could implement this month

After this month’s review, the Monetary Board’s remaining meetings for this year are scheduled for Oct. 9 and Dec. 11.

Both traders said that the release of July US consumer price index data also bolstered expectations of a September reduction by the Federal Reserve, which caused GS yields to rally.

“However, after the US PPI (producer price index) reports came in stronger than anticipated, traders have tempered their expectations that the US central bank could cut more aggressively this year, returning to previous expectations of a total 50-bp cut from the Fed,” the first trader said.

A Federal Reserve interest rate cut in September, the first this year, followed perhaps by another before yearend remains the base forecast for most economists polled by Reuters amid rising concerns about the health of the world’s biggest economy, Reuters reported.

US inflation is rising again, with more upward pressure expected from President Donald J. Trump’s tariffs, and there have been big downward revisions to hiring figures over recent months that suggest the job market is weakening.

Mr. Trump has berated Fed Chair Jerome H. Powell over his reluctance to cut rates. And at the July meeting there was clear divergence from the steady rates position among a minority of Federal Open Market Committee members.

Alongside simmering doubts over the Fed’s independence from political interference and declining reliability of economic data, it has become more difficult for economists to make predictions with great conviction.

Economists are broadly sticking to a more cautious outlook than interest rate futures traders, whose pricing suggests a near-certainty of a September cut and strong likelihood of another, and the possibility of a third by year-end.

A 61% majority, 67 of 110, predicted the Fed would lower its benchmark interest rate by 25 bps to 4%-4.25% on Sept. 17 for the first time this year, up from 53% in July’s survey. One forecast a 50-bp move.

The remaining 42 said the Fed would hold rates again.

Over 60% of respondents, 68 of 110, predicted there would be either one or two rate cuts this year, broadly unchanged from last month. But there was no consensus on where the federal funds rate would be at end-2025.

“The other main driver this week was likely the BTr’s (Bureau of the Treasury) management of the RTB (retail Treasury bond) offer period as it encountered a strong enough demand to have to actively manage the offering by closing the offer to institutions last Friday (Aug. 8) and restricting it further to sponsored accounts last Wednesday (Aug. 13),” the second trader added.

For this week, the first trader said the market may adopt a more cautious stance due to the shortened trading week and as they wait for possible policy signals from the Fed.

The second trader said there could be some volatility early in the week as the market could react to the US data released over the weekend.

“We’ll also see the new RTBs become free to trade on the 20^th and it will be interesting to see where it trades considering that the comparable five-year bond currently trading in the market was traded to a low of 5.75% [on Friday], or 25 bps lower than the 6% coupon of the new RTBs,” the trader said. — Heather Caitlin P. Mañago with Reuters