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Yields on gov’t debt rise on tightening bets

YIELDS on government securities (GS) rose last week as investors remained defensive due to expectations of more rate hikes from the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve next month.

Debt yields, which move opposite to prices, climbed by an average of 15.41 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of Oct. 21 published on the Philippine Dealing System’s website.

Rates at the short end of the curve climbed. The yield on the 91-day Treasury bill (T-bill) gained 18.5 bps (to 3.5554%), the 182-day paper jumped by 36.39 bps (4.3793%), and the 364-day T-bill rose by 4.26 bps (3.9236%).

The belly of the curve also surged. The two-, three- four-, five-, and seven-year Treasury bonds (T-bond) saw their yields increase by 24.39 bps (5.9087%), 29.05 bps (6.279%), 27.88 bps (6.5504%), 23.59 bps (6.7723%), and 12.90 bps (7.0795%), respectively.

Meanwhile, the long end of the curve ended mixed. The 10-year paper rose by 18.02 bps to yield 7.3823%, while the 20- and 25-year papers dropped by 12.31 bps (7.204%) and 13.21 bps (7.1969%), respectively.

Total GS volume traded reached P4.58 billion on Friday, jumping from the P3.769 billion recorded on Oct. 14.

Analysts said rates of government securities continued to climb as the market expects further tightening from the Fed and the BSP next month amid rising inflation.

“GS yields increased over the week as various Federal Reserve officials reiterate the US central bank’s plan in raising policy rates further to address elevated inflation,” a trader said in an e-mail.

“Yields likewise rose after BSP Governor Felipe M. Medalla hinted at a potentially stronger 75-bp rate hike at their November policy meeting,” the trader added. “Market participants have leaned toward the long end of the yield curve as the current levels continue to remain relatively more attractive for bond holders, even as short-term rates are likewise elevated.”

A second bond trader said market players remained defensive following the Bureau of the Treasury’s (BTr) auction of fresh 10-year bonds last week.

“Market players continued to be defensive post-auction given that the coupon rate was relatively higher than the secondary market rates. Key theme for the week was risk aversion and hesitancy to build up major bond positions due to the rising interest rates backdrop,” the second bond trader said in a Viber message.

Mr. Medalla said earlier this month that the central bank will consider another big rate hike at their Nov. 17 policy meeting to support the peso and prevent its depreciation from further stoking inflation.

He said they are looking at a 50-bp or 75-bp increase next month to help cool inflation and ease currency pressures stemming from a strong dollar amid the Fed’s hawkish stance.

The BSP has raised benchmark rates by 225 bps since May.

Meanwhile, the Fed is likely to deliver another large rate hike at its own meeting next month as inflation remains high, with more increases also expected to be on the table until next year.

The US central bank has raised rates by 300 bps since March and will next meet on Nov. 1-2.

On the other hand, the government fully awarded the fresh 10-year T-bonds it offered last week on strong demand for higher-yielding instruments amid expectations of more rate hikes here and abroad.

The BTr raised P35 billion as planned via the fresh 10-year T-bonds, with total tenders reaching P58.411 billion.

The debt papers were awarded at a coupon rate of 7.5%, 29.81 bps higher than the 7.2019% quoted for the 10-year tenor at the secondary market before the auction, based on the PHP BVAL Service Reference Rates data provided by the Treasury. Accepted rates ranged from 7% to 7.5% for an average of 7.344%.

For this week, analysts expect yields on government debt to continue rising ahead of the Fed’s policy meeting on Nov. 1-2.

“Local yields might move higher this week as expectations of an elevated reading for the US personal consumption expenditure inflation, which is the Federal Reserve’s inflation gauge,” the first trader said.

The second trader said markets widely expect the Fed to hike rates by 75 bps for a fourth straight time at their next meeting and to continue being aggressive to end the year.

“Moreover, potential catalysts of local yields also include the 13-year FXTN 25-07 auction on Tuesday, the BTr’s borrowing plan for November, and the BSP’s inflation forecast for the current month,” the second trader added.

On Tuesday, the Treasury will auction off P35 billion in reissued 25-year bonds with a remaining life of 12 years and 11 months. — B.T.M. Gadon

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