Gov’t debt yields decline on BSP policy easing bets

By Marissa Mae M. Ramos
Researcher
YIELDS ON government securities (GS) fell amid a risk-off tone in the market following lower inflation expectations and speculations that the central bank will cut its benchmark rates and banks’ reserve requirement ratio soon.
On average, prices of debt papers rose as its yields dropped by 13.03 basis points (bp) from week-ago levels, according to PHP Bloomberg Valuation Service Reference Rates as of March 8 published on the Philippine Dealing System’s website.
“Most local benchmark interest rates (PHP BVAL yields) declined by 0.15-0.20 basis point week-on-week, after the lower-than-expected [February] inflation…,” said Rizal Commercial and Banking Corp. (RCBC) economist Michael L. Ricafort.
“Local interest rate benchmarks also declined after hints of possible local monetary policy easing amid the declining inflation trend and earlier hints about plans to cut large banks’ reserve requirement ratio (RRR)…” he added.
A bond trader interviewed had the same assessment, saying speculations on lowering the RRR sooner than expected has “emboldened players to take more risk.”
The trader added that the market rallied “as players cheered the appointment of new Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.”
Mr. Diokno was chosen by President Rodrigo R. Duterte to replace the late BSP Governor Nestor A. Espenilla, Jr., who died of cancer last Feb. 23. He will serve as the BSP governor for the remaining four years of Mr. Espenilla’s term, which is until July 2023.
Last week, Mr. Diokno said he wants to “expedite” the process of cutting the RRR. However, he clarified the decision still rests upon the Monetary Board and will be based on data provided by the central bank’s technical staff.
The former Budget chief also said he sees room for monetary easing after inflation slowdowns. To recall, the spike in inflation last year had prompted a cumulative 175 bps increase in policy rates last year.
Last year, the BSP cut the RRR twice from 20% to 18%. It was in line with Mr. Espenilla’s goal to reduce the ratio to single digits by 2023.
Data released earlier last week by the Philippine Statistics Authority showed headline inflation moderating to 3.8% in February from the 4.4% recorded in January, marking the slowest reading since the 3.8% logged in the same month last year.
It also marked the fourth straight month of deceleration from the nine-year 6.7% peak recorded in September and October last year.
At the secondary market last Friday, GS yields declined across the board with the exception of the 364-day Treasury bills (T-bill) that gained 2 bps week-on-week to fetch 6.08%. The 91- and 182-day T-bills lost 13.60 bps and 1 bps, respectively, yielding 5.434% and 5.878%.
At the belly of the curve, the two-, three-, four-, five- and seven-year debt papers finished at 5.972%, 5.982%, 5.997%, 6.017%, and 6.056%, respectively, decreasing by 9.1 bps, 10.7 bps, 12.5 bps, 14.3 bps, and 18.6 bps from a week ago.
Rates of longer tenors likewise dipped, with the 10-, 20-, and 25-year Treasury bonds declining by 21.5 bps (6.101%), 27.2 bps (6.364%), and 16.8 bps (6.565%), respectively.
Both market observers expect the yield movements seen last week to continue in the coming weeks.
“[L]ocal benchmark interest rates could still continue their declining trend amid expectations that local inflation could further ease in the coming months, possible local monetary easing and/or cut in large banks’ RRR…, [and] recent signals of slower global economic growth that fundamentally supports lower global inflation and interest rates as well,” said RCBC’s Mr. Ricafort.
The bond trader shared the same view: “We expect the GS market to sustain strong buying momentum amid slower inflation expectations ahead, coupled with bond-friendly signals from the new BSP Governor Diokno,” the bond trader said.
The trader added that “bond-friendly signals” such as the cutting of the RRR and policy rates could happen as early as the second quarter.