Government debt yields end mixed after rate cut

By Marissa Mae M. Ramos
Researcher

YIELDS on government securities (GS) ended mixed last week as market players reacted to the developments between the US and China as well as BSP’s interest rate cut.

Debt yields dipped by an average of 3 basis points (bps) on a week-on-week basis, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates published on the Philippine Dealing System’s website last Sept. 27.

“Local yields were slightly lower this week due to safe haven demand from fluctuating trade developments between US and China,” a bond trader said in an interview.

The market reaction was due to the cancelled visit of a Chinese delegation to farms in Montana after US President Donald Trump’s comments against China during the UN General Assembly, the bond trader said.

“Yields likewise fell due to dovish BSP (Bangko Sentral ng Pilipinas) policy expectations and impeachment concerns in the US,” he added.

Rizal Commercial Banking Corporation (RCBC) economist Michael L. Ricafort called the decline a “slight healthy downward correction” which came after the “widely expected 0.25 bps cut in the local policy rates by the BSP following the 0.25 bps cut in the key short-term interest rates by the US Federal Reserve on Sept. 18.”

“Any further easing of local monetary policy by way of a cut in local policy rates and/or any further cut on banks’ RRR (reserve requirement ratio) cannot be completely ruled out, especially if the US Federal Reserve makes further cut/s in the key US short-term interest rates and/or local GDP growth data remain relatively soft,” he said in an e-mail.

The BSP trimmed benchmark interest rates for the third time this year on its policy meeting last Thursday. The move left the overnight reverse repurchase (RRP) rate at four percent (from 4.25%), the overnight deposit rate at 3.5% (from 3.75%), and the overnight lending rate at 4.5% (from 4.75%).

The country’s central bank also decided to cut its inflation forecast to 2.5% this year from the 2.6% in its Aug. 8 meeting. Headline inflation rate averaged 3% as of August.

RRR of the local banks were likewise lowered by 100 bps a day after the policy rate cut. Reserve requirements for universal banks decreased to 15%, thrift banks to 5%, and rural banks to 3%.

At the external front, the Fed already cut its interest rate by a quarter-point earlier this month.

On Thursday, US Agriculture Secretary Sonny Perdue confirmed China’s cancellation of the visit in the US farms that was previously labelled as a “goodwill” gesture. The cancellation further fueled market sentiment which came after Mr. Trump said he would not like an agreement with China to buy more US goods, but a complete trade deal instead.

The US president further said that China’s “abuse” of the system was “over” at the UN. Formal impeachment proceedings were also filed by US Democrats against Mr. Trump last week.

As a result, GS yields finished mixed in the secondary market last Friday. Short-term debt papers such as the three- and six-month Treasury bills (T-bill) declined by 7.8 bps and 6.1 bps, respectively, to end at 3.129% and 3.401%. Meanwhile, the one-year T-bills were steady at 3.705%.

At the belly of the curve, yield of the two-year notes inched upward by 0.5 bp to 4.051% from 4.046% the previous week. On the other hand, the rate on the three-year Treasury bonds (T-bond) remained at 4.21%, while the four-year T-bonds slipped 0.4 bp to 4.365% from 4.369%.

Yields on the five- and seven-year debts increased by 0.2 bp and 1.3 bps, respectively, to 4.512% and 4.701%.

In contrast, debt papers at the long end fell with the 10-, 20-, and 25-year papers, losing 1.6 bps (4.82%), 8.6 bps (5.115%), and 10.1 bps (5.1%), respectively.

Moving forward, RCBC’s Mr. Ricafort said that “[m]ost local interest rate benchmarks (PHP BVAL yields) could still continue the latest week’s slight healthy downward correction” which could stem from the quarter point cut by the BSP, the easing inflation trend in the country to be reported on Friday, and the stronger performance of the peso.

Mr. Ricafort also noted the lower global oil prices and the easing of the benchmark bond yields in the US and in other developed countries as possible catalysts.

The bond trader added, “Local yields might move with a downward bias next week, as expectations of weaker Philippine and Eurozone inflation releases for September 2019 might support views of further monetary policy easing from various central banks.”

“The decline in yields, however, might be capped by likely stronger US labor reports and market optimism ahead of the scheduled trade talks between the US and China on Oct. 10.”