Debt yields up as market eyes Fed, BSP hikes

YIELDS ON government securities (GS) continued to rise last week as traders remained cautious on growing expectations of rate hikes from the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP).

On average, GS yields went up by 29.28 basis points (bps) week-on-week on Friday as bond prices dipped from a week ago levels, data from the Philippine Dealing & Exchange Corp. showed.

“Yields rose week on week by an average 8-12 bps across the board as market reacted to [Fed Chairman Jerome] Powell’s comments on the possibility of more than expected rate hikes in the US,” said Carlyn Therese X. Dulay, head of Institutional Sales at Security Bank Corp.

“The increase in yields is widely expected, especially since investors are starting to price in more fully the possibility of another US rate hike in March. [Mr. Powell’s] speech bolstered speculations of four US rate hikes this year, instead of just three rate adjustments,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines.

Last Tuesday, the head of the US central bank vowed before the House of Representatives’ Financial Services Committee to balance the impact of an excessive inflation by affirming to “gradually raise interest rates.”

For local investment manager First Metro Asset Management, Inc. (FAMI), investors have also factored in “pending” rate hikes by the BSP.

“Traders are cautious ahead of the pending interest rate hike, both by the Fed and the BSP. We expect BSP will adjust its policy rates in March based on a rising inflation,” it said.

Bond traders have noted that market players have preferred short- over long-tenured securities.

“Traders just want to be at the short-end of the yield, especially at the 3-year and 5-year Treasury bonds (T-bonds). Investors prefer not to lock their funds in GS with longer maturities,” FAMI said.

“The greatest movements were observed in tenors up to three years primarily because short-term notes are more reactive to changes in policy expectations,” said Mr. Dumalagan.

At the secondary market, Treasury bills (T-bills) ended with the highest yields week-on-week. The 364-day T-bills climbed the most by 90.77 bps to 3.94%. Meanwhile, the 91-day and 182-day T-bills jumped 51.02 and 62.21 bps to 3.41% and 3.68%, respectively.

Bonds at the belly of the curve also surged, led by the 3-year and 5-year securities up by 35.50 bps and 14.44 bps, respectively. The 20-year notes also lifted the long-end of the curve, which yielded 7.03% or 46.93 bps higher than a week ago.

This week, analysts said yields will continue to rise.

“Pressure remains for higher yields as market participants remain defensive and cautious ahead of the new 5-year issuance scheduled Tuesday with indications between 5.375-5.625 and of Philippine CPI (consumer price index) print,” Ms. Dulay said.

For FAMI, traders will speculate “as they wait for further announcements from the BSP and Fed on rate hikes. We expect the BSP will increase its policy rates 2-3 times for the whole year.”

Mr. Dumalagan agreed on the upward pressure, but for his part said, “volatility might be elevated amid likely mixed data from major foreign economies.”

“There might also be more rumors about further tightening moves from the European Central Bank (ECB) this year after this month’s ECB monetary policy meeting. Some investors are expecting the ECB to start hiking its policy rates towards the end of the year,” he explained.

“Volatility, however, could possibly escalate, especially if the growth data [in Europe] and Japan are revised downwards, and if China’s trade report comes out weaker-than-expected. These potentially soft reports could partly offset the projected increase in yields by fueling demand for safer assets such as government bonds,” he added.

On Tuesday, the Bureau of the Treasury will auction 5-year fixed rate bonds amounting to P20 billion. On the same day, the February inflation data rebased on 2012 prices will be released, which analysts expect will be normalized given the new methodology used for computation. — Carmina Angelica V. Olano