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Yields on government debt increase

YIELDS ON government securities (GS) went up last week as inflation continued its uptrend to reach a 26-month high in February.

GS yields, which move opposite to prices, rose by an average of 12.92 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of March 5 published on the Philippine Dealing System’s website.

Yields on benchmark tenors increased on Friday from their Feb. 26 finish, except for those on the four-, five-, and seven-year Treasury bonds (T-bonds), which declined by 0.46 bp, 2.59 bps, and 0.25 bp, respectively, to 2.7486%, 3.0011%, and 3.4789%.

The largest increases were observed in the long end of the yield curve, particularly the 20- and 25-year T-bonds which saw their rates go up by 41.06 bps (to 4.8707%) and 55.84 bps (4.8716%), respectively. The yield on the 10-year debt paper also increased by 8.76 bps to 3.9806%.

Meanwhile, the two- and three-year T-bonds were quoted at 2.185% and 2.4865%,  respectively, rising by 6.99 bps and 3.29 bps.

The shorter termed Treasury bills (T-bills) likewise posted increases in their yields. This was led by the 364-day paper’s 12.79-bp increase to 1.6834%. The 91-day T-bills also rose by 8.54 bps (to 1.0816%) and the 182-day securities added 8.19 bps (1.195%).

“Yields inched up further as investors await the February inflation data which came out at 4.7%, broadly in line with estimates but still faster than the previous month… The recent uptick in prices put upward pressure on yields and effectively on the government’s borrowing cost,” First Metro Asset Management, Inc. (FAMI) said in an e-mail.

“Inflation erodes your real interest rate. As investors’ inflation expectations adjust higher, yields will continue to move higher in the secondary market as well,” ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro said.

The 4.7% headline inflation rate in February marked the fifth straight month of acceleration in the rise in prices of goods, the Philippine Statistics Authority reported on Friday. The figure was also the fastest in 26 months or since the 5.1% rate in December 2018.

The February result was within the Bangko Sentral ng Pilipinas’ (BSP) forecast range of 4.3%-5.1% for the month. It brought the year-to-date inflation average to 4.5%, also higher than the BSP’s 2-4% target for the year.

BSP Governor Benjamin E. Diokno has said the rise in inflation was caused by supply side shocks and would not merit a monetary response “unless they lead to second-round effects.”

The BSP Monetary Board at its meeting on Feb. 11 kept key interest rates unchanged at record lows. Its next review will be on March 25.

The central bank last year slashed rates by a total of 200 bps to provide support to the virus-stricken economy. This brought down the overnight reverse repurchase, lending, and deposit rates to record lows of 2%, 2.5%, and 1.5%, respectively.

“While we saw some signs of stabilization on the belly (five- to seven-year T-bonds) of the yield curve towards the end of the week, we expect upward pressures to persist,” ATRAM Trust’s Mr. Liboro said.

Meanwhile, FAMI expects the market to “remain defensive and take directional cues” from this month’s T-bond auctions.

“The movements in the US Treasuries (USTs) will also influence sentiment in the local GS space. USTs continued to sell off as [US Federal Reserve Chair Jerome Powell’s] recent speech did not mention greater quantitative easing in response to the recent rise in Treasury yields. The US 10-year yield now hovers above 1.5%,” FAMI added.

The Treasury is looking to borrow P160 billion from the local market this month: P100 billion via weekly T-bill auctions and P60 billion in fortnightly offerings of T-bonds. It is offering seven- and 10-year bonds worth P30 billion each, scheduled to be auctioned off on March 9 and 23, respectively.

Meanwhile, Mr. Powell made his remarks at a virtual Wall Street Jobs Summit last Thursday (1:05 a.m. local time), which is likely his last public event before Fed officials meet on March 16-17. While his speech reiterated the intention to keep benchmark interest rates low until employment and inflation targets have been met, he made no mention of plans to keep US Treasuries from rising, leading these debt papers to increase further. — Ana Olivia A. Tirona

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