Debt yields rise as war keeps market cautious

YIELDS on government securities (GS) traded at the secondary market ended higher last week, even as trading stayed cautious due to lingering uncertainty over developments in the Middle East.

GS yields, which move opposite to prices, went up by an average of 6.33 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of May 22 published on the Philippine Dealing System website.

At the short end of the curve, yields on 91-, 182-, and 364-day Treasury bills (T-bills) jumped by 14.52 bps, 16.79 bps and 3.94 bps week on week to 5.0563%, 5.4593 and 5.9534%, respectively.

At the belly, rates also rose across the board, with the two-, three-, four-, five-, and seven-year Treasury bonds (T-bond) climbing by 16.46 bps (to 6.9359%), 9.84 bps (7.202%), 4.04 bps (7.3598%), 1.13 bps (7.454%) and 2.84 bps (7.595%), respectively.

At the long end, yields on the 20- and 25-year papers dropped by 6.34 bps and 6.74 bps week on week to end at 7.6806% and 7.6766%, respectively. Meanwhile, 10-year T-bond rose by 13.10 bps week on week to fetch 7.7461%.

GS volume traded rose to P27.69 billion on Friday from P15.87 billion on May 15.

Alessandra P. Araullo, chief investment officer at ATRAM Trust Corp, said in a Viber message that the market was mostly muted last week as the United States and Iran continued to exchange threats, keeping traders cautious.

“Market participants remained defensive, with bid-offer spreads staying wide throughout the week. This cautious tone was further reinforced by the seven-year auction, where implied yields would have reached as high as 8.125% had the issue not been rejected, highlighting weak demand,” she said. “As a result, secondary market yields drifted modestly higher, with liquidity conditions deteriorating further and bid-offer spreads widening compared to the previous week.”

“Recent developments regarding possible closing of a deal between US and Iran provided some optimism in the global markets, where US Treasury yields declined by 3-10 bps. This, however, did not translate to the local fixed income market, as rising inflation, weak peso performance, and hawkish signals from the Bangko Sentral ng Pilipinas (BSP) continue to fuel risk-off sentiment,” Reginald Carl R. Reyes, head of fixed income at Security Bank Corp., said in an e-mail.

He added that the Bureau of the Treasury’s (BTr) move to reject all bids for the reissued bonds it auctioned off last week helped cap the rise in yields.

BSP Governor Eli M. Remolona, Jr. said they are considering more aggressive policy action, including an off-cycle rate hike, to help curb spiraling prices as the Middle East conflict continues to stoke inflation.

He said in an exclusive interview on One News’ Money Talks with Cathy Yang on Thursday that the Monetary Board (MB) is considering a second straight hike, possibly even before their scheduled June 18 meeting, adding that more decisive action is needed to respond to the “big” and “persistent” supply shock posed by the war so that they would not fall behind the curve.

The BSP on April 23 delivered its first increase in over two years, raising benchmark borrowing costs by 25 bps to bring the policy rate to 4.5%.

Inflation has breached the BSP’s 2%-4% target and monthly forecasts since the war erupted in late February. In April, rising costs of food and utilities amid elevated oil prices drove the headline print to an over three-year high of 7.2% from 4.1% in March. This was past the central bank’s 5.6%-6.4% forecast for the month.

Mr. Remolona said the May inflation report would be a key data point for their next policy move.

Meanwhile, the peso last week sank to a new historic low of P61.75 versus the dollar. On Friday, it closed at P61.69.

For this week, Ms. Araullo said GS yields could continue to see upward pressure.

“(T)he upcoming 10-year auction is likely to attract better demand compared to recent issuances, as current levels begin to offer more compelling value. This could provide some near-term support to the market, along with a modest tightening in bid-offer spreads,” she said.

“While the US GDP (gross domestic product) print will be monitored, market focus is likely to remain on developments surrounding the US-Iran situation, particularly any signs of de-escalation. In addition, the BSP has signaled the possibility of an off-cycle rate hike, which will be a key risk factor to watch,” Ms. Araullo said.

Mr. Reyes added that the market will likely stay risk averse.

“Developments on the ongoing US-Iran conflict will remain at the forefront of market drivers. Locally, BSP Governor Remolona hinted a possible off-cycle rate hike ahead of their June MB meeting. All eyes will be on the release of May inflation figures as this will heavily influence the BSP’s next policy move.” — Lourdes O. Pilar