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Yields on gov’t debt climb on inflation expectations

By Marissa Mae M. Ramos, Researcher

YIELDS on government securities (GS) climbed last week on market expectations of faster inflation in the coming months.

GS yields, which move opposite to prices, went up by an average of 8.64 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of Feb. 19 published on the Philippine Dealing System’s website.

At the secondary market, the yield on the 364-day Treasury bills (T-bills) increased by 6.4 bps to 1.4963%. On the other hand, the 91- and 182-day T-bills saw their yields decline by 12.49 bps (to 0.8495%) and 8.84 bps (1.0605%), respectively.

Rates at the belly of the yield curve picked up, with the two-, three-, four-, five-, and seven-year debt papers closing the week higher by 13.26 bps (1.9958%), 17.46 bps (2.3448%), 20.79 bps (2.6379%), 23.26 bps (2.8712%), and 25.23 bps (3.1365%), respectively.

At the long end, the 10-year Treasury bonds (T-bonds) gained 17.51 bps to finish at 3.289%. Meanwhile, the rates of the 20- and 25-year T-bonds declined by 1.9 bps (4.0466%) and 5.65 bps (4.0171%), respectively.

“Reason for the uptick really is elevated inflation that is feared may extend for a number of months,” Security Bank Corp. Chief Investment Officer for Trust and Asset Management Group Noel S. Reyes said in an e-mail.

“Transport cost will be high with oil near $60, but at the end of January, it was only at $52. Peso was also weaker in the second half of February which can add to import costs,” Mr. Reyes said.

The peso closed at P48.45 against the dollar on Friday, lower by 40.6 centavos compared with a week ago.

Meanwhile, headline inflation picked up to 4.2% in January, the fastest pace recorded in two years or since January 2019’s 4.4% due to faster increases in the prices of food and transportation.

The Bangko Sentral ng Pilipinas raised its average inflation forecast for this year to 4% from 3.2% previously.

Mr. Reyes added that the government’s offering of three-year retail Treasury bonds (RTB) is “looking to be a large issue as the government is not capping the size yet.”

The government sold an initial P221.218 billion in three-year RTBs at the rate-setting auction on Feb. 9, with total bids reaching P284.183 billion. The debt papers fetched a coupon rate of 2.375%, 200 bps lower than the 4.375% rate quoted for the RTBs sold in February 2020. The offering is set to run until March 4, unless closed earlier.

Meanwhile, a bond trader likewise pointed to heightened inflation expectations as a primary factor for last week’s yield movement, but added that the market also reacted to the volatility in US Treasuries.

“Catalysts [this] week would be the budget balance and the final amount of money that can be raised by the BTr in the RTB offering. If they are not able to raise money now, the market may take it as a sign that it will have to issue more,” the trader said via Viber.

Security Bank’s Mr. Reyes expects government debt yields to continue increasing in the coming weeks.

“[T]he curve is still on a steepening path that even the T-bills auction may succumb to a widening trend and come out higher by 5 to 10 bps,” he said.

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