Gov’t securities rally on BSP rate cut, euro bonds

GOVERNMENT SECURITIES extended their rally last week following the Bangko Sentral ng Pilipinas’ (BSP) interest rate cut and the Treasury’s euro bond sale.

On average, debt yields fell by 5.95 basis points (bp) week-on-week, according to PHP Bloomberg Valuation (BVAL) Service Reference Rates as of May 10 published on the Philippine Dealing System’s website.

“Philippine benchmark interest rates (PHP BVAL) mostly declined for the third straight week…after the latest cut in the key local policy rates by 0.25% on May 9…though already partly priced in/expected already in the markets, as triggered by the surprise slower-than-expected 1Q 2019 GDP (gross domestic product) growth…,” Rizal Commercial Banking Corp. (RCBC) Economist Michael L. Ricafort said in an email, noting that the slower headline inflation print reported last Tuesday was “another major catalyst.”

Mr. Ricafort added that the government’s euro bond sale may have also affected yield movements as the successful fund raising “fundamentally reduces the need for the government to borrow from the local market.”

The central bank’s Monetary Board (MB) on Thursday cut benchmark interest rates by 25 basis points in its third policy review for the year, hours after the Philippine Statistics Authority (PSA) reported that the economy grew at 5.6% — the slowest clip in four years — last quarter and two days after the PSA said inflation eased to 3% in April — the slowest pace in 16 months.

The MB’s decision, which it said was due to a “manageable” inflation outlook, brought the interest rate on the BSP’s overnight reverse repurchase facility to 4.5% effective last Friday. The rates on the overnight lending and deposit facilities were also reduced accordingly to 5% and 4%, respectively.

This partially dialled back the cumulative 175-bp in hikes implemented by the BSP through five meetings last year as it sought to rein in inflation, which hit a peak of 6.7% in September and October.

Following its review, the BSP also lowered its 2019 inflation forecast to 2.9% from 3% in the previous meeting, but upped next year’s outlook to 3.1% from 3%. Inflation averaged at 3.6% in the first four months.

BSP Governor Benjamin E. Diokno said that a potential cut in big banks’ reserve requirement ratio (RRR), currently at 18%, will be on the table at the MB’s meeting this week.

Meanwhile, the government on Friday said it raised €750 million ($842.33 million) via eight-year euro-denominated bonds in an offering that was six times oversubscribed.

The euro bond issuance, which was the country’s first in 13 years, had a coupon of 0.875% and offers 70 bps over benchmark, National Treasurer Rosalia V. De Leon said.

The government raised more than the original target of €500 million after orders reached almost €3 billion, Ms. De Leon added.

With the exception of the 25-year Treasury bonds (T-bond), all tenors rallied at the secondary market last Friday.

At the short end, the 91-, 182- and 364-day Treasury bills went down by 8.8 bps, 7.7 bps, and 0.7 bp to yield 5.605%, 5.865%, and 6.067%, respectively.

At the belly of the curve, the rates of the two-, three-, four-, five-, and seven-year T-bonds declined by 10.1 bps (5.798%), 10.4 bps (5.745%), 9.2 bps (5.721%), 7.1 bps (5.718%), and 3.8 bps (5.741%), respectively.

Meanwhile, at the long end, the 10- and 20-year T-bonds saw their yields go down by 5.9 bps (5.746%) and 2.7 bps (5.954%). On the other hand, the rate of the 25-year debt paper went up by around a basis point to 6.109%

“For [this] week, most local interest rate benchmarks could still continue to ease as the markets will be anticipating the discussion of large banks’ reserve requirement ratio by the BSP’s Monetary Board,” RCBC’s Mr. Ricafort said, noting that a 100-bp cut in the RRR would inject around P90 billion in additional liquidity into the financial system.

For his part, ATRAM Trust Corp. president and managing director Deanno J. Basas expects yields to go down further.

“We could see yields continue to move down the next few weeks with the market starting to expect further rate cuts from the BSP this year on lower inflation and to support growth,” Mr. Basas said in a separate e-mail, noting that the BSP’s RRR review would “also put downward pressure on rates in the short term.” — Marissa Mae M. Ramos