Gov’t debt yields decline on monetary easing bets

YIELDS ON government securities (GS) fell across the board last week amid expectations of rate cuts by the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve, as well as investors flocking to haven assets.

On average, GS yields went down by six basis points (bps) week on week, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates as of July 19 published on the Philippine Dealing System’s website.

At the short end of the curve, yields on the 91-, 192-, and 364-day Treasury bills (T-bills) declined by 0.3 basis point, two bps, and 4.3 bps, respectively, to 4.12%, 4.342%, and 4.772%.

At the belly, the rates of the two-, three-, four-, five- and seven-year Treasury bonds declined by 8.5 bps (4.769%), 7.5 bps (4.801%), 8.3 bps (4.830%), 10.1 bps (4.852%), and 11.4 bps (4.889%), respectively.

At the long end, the 10-, 20-, and 25-year debt papers declined by eight bps, 2.4 bps, and 2.8 bps, respectively, yielding 4.939%, 5.066%, and 5.063%.

“Local yields were generally on a downtrend as expectations of policy easing from the US Federal Reserve and the BSP continue to pull yields lower,” a bond trader said in an e-mail.

“Bets of a possible 50 bps Fed rate cut surged after New York Fed John Williams and Fed Vice Chair Clarida commented that the Fed needs to act proactively with a rate cut instead of waiting to see any negative impact on the US economy before doing so,” the bond trader added.

“BVAL yields continued to decline week-on-week…largely due to expectations on the possible easing of local monetary policy by way of a cut in local policy rates as early as the next monetary policy-setting meeting on August 8…amid continued easing trend in inflation, as well as increased possibility of a cut in the key US policy rates by the Federal Reserve as early as July 31,” Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort said in a separate e-mail.

The Fed is expected to cut rates for the first time in a decade at its July 30-31 policy meeting.

Fed chair Jerome Powell earlier hinted on a possible cut in interest rates, saying the US central bank will “act as appropriate” to sustain expansion given the headwinds that are weighing on the US economy.

Meanwhile, BSP Governor Benjamin E. Diokno also hinted on a likely cut in policy rates in the second half of the year before moving to reduce banks’ reserve requirement ratio (RRR).

Another 50-bp reduction in reserve ratios will be implemented this Friday, bringing the RRR of big banks to 16% and thrift banks to 6%, which completes the phased cuts the BSP announced in May.

Aside from monetary easing bets, the bond trader likewise attributed the fall in yields to the “re-escalation of trade tensions” between the US and China as well as new trade conflicts between Japan and South Korea that drove some safe-haven demand toward government bonds.

Japan is considering taking a dispute with South Korea over its compensation for wartime forced laborers to the International Court of Justice as the deadline for seeking third-country arbitration passes on Thursday, public broadcaster NHK reported.

The question of compensation for South Koreans for labor during Japan’s 1910-45 occupation of the Korean peninsula has soured the U.S. allies’ relations, which took a turn for the worse this month when Japan restricted exports of high-tech material to South Korea.

For this week, the analysts said yields may go down ahead of US data and the BSP’s RRR cut.

“Yields might move with a downward bias [this] week on expectations of weaker second-quarter US economic growth, bets of dovish guidance from the European Central Bank, and positioning ahead of the BSP’s July 2019 reduction of the RRR,” the bond trader said.

Likewise, RCBC’s Mr. Ricafort also expects GS yields to continue to ease this week “especially if US/global bond yields continued to remain relatively lower amid the recent easing in global oil prices, lingering US-China trade war, [and the] increasing odds recently of a bigger cut in federal fund rates.” — Beatrice M. Laforga with Reuters