YIELDS on government securities (GS) rose as the market awaited the US Federal Reserve’s and the local central bank’s rate hikes and the peso depreciating to a new record low.
Debt yields, which move inversely to prices, jumped by an average of 12.31 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of Sept. 23, published on the Philippine Dealing System’s website.
Yields on the short end of the curve climbed the most as the 182-day Treasury bills (T-bills) increased by 23.52 bps (to 3.7042%), followed by the 91-day and the 364-day T-bills, which went up by 20.93 bps (2.7762%) and 1.33 bps (3.9280%).
The belly of the curve ended mixed with the two- and three-year Treasury bonds (T-bonds) decreasing by 6.71 bps (5.1587%) and 2.98 bps (5.5341%), while the four-, five-, and seven-year T-bonds rose by 5.21 bps (5.9070%), 14.65 bps (6.2568%), and 22.24 bps (6.6793%), respectively.
At the long end of the curve, yields on the 10-, 20-, and 25-year papers rose by 22.48 bps (6.9460%), 17.65 bps (7.2329%), and 17.07 bps (7.2255%).
Total GS volume traded reached P11.839 billion on Friday, lower than the P6.563 billion recorded on Sept. 16.
In an e-mail, ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro said that the market was affected earlier in the week by the US Fed and the Bangko Sentral ng Pilipinas’ (BSP) meetings as well as after it, which made the market defensive all week.
“Defensive bids and thin volumes in the market were directly related to risks of a more hawkish than expected Fed and the immediate implications on both the USD/PHP spot rate as well as policy actions from our own BSP,” Mr. Liboro said.
Last week, the US Fed announced its third consecutive rate hike, going up by 75 bps.
A bond trader said in a Viber message that the market expected the move as the Fed continues to aggressively lower inflation.
“The US Fed Funds Target rate is now expected to remain high through 2023, according to the official projections made by its members,” the trader added.
Locally, the BSP also had its monetary board meeting on Sept. 22, which resulted in another 50-bp rate hike to also address inflationary pressures in a move to bring down the country’s inflation within the 2% to 4% target range of the central bank by the end of 2022.
“Given elevated uncertainty and the predominance of upside risks to the inflation environment, the Monetary Board recognized the need for follow-through action to anchor inflation expectations and prevent price pressures from becoming further entrenched,” the central bank said in a press release.
Both analysts said that the market was expecting the rate hike by the BSP, which was welcomed by the market in hopes of lessening the risk of the further depreciation of the peso against the greenback.
Last week, the peso closed at P58.50 versus the dollar, a new record low as the currency continues to be affected by the US Fed’s aggressive move.
“Market players also can’t ignore the local currency navigating uncharted territory at the P58.00 to P58.50 levels this week, this may have dampened sentiment for local assets given its effect on our domestic inflation. Obviously, these developments did not bode well for local bonds which caused domestic yields to rise week on week,” the trader said.
BSP Governor Felipe M. Medalla said in an interview that the central bank looks at borrowing more through auctions and hiking rates in the coming months to address the depreciating peso.
“Immediate impact will be more sentiment-based with investors likely to remain defensive for the time being. With broad USD strength expected to continue until year-end, at the very least, investors will be looking keenly at the impact that further peso depreciation could have on inflation expectations as well as the risk of potentially negative outlooks towards the Philippines’ credit rating,” Mr. Liboro said.
“For the week ahead, bearish sentiment is expected to persist given the foreseen rise in policy rates in the coming months. This week’s 16-year FXTN auction is another catalyst that will also be looked at. Said auction may range from 7.250% to 7.500% levels,” the bond trader said.
“Front-end will be most affected by the recent (and potential subsequent) BSP rate hikes — but the long end will continue to remain defensive until market expectations of inflation begin to stabilize amid the current strong USD environment. That being said, with absolute levels already attractive and the prospect of yields north of 7% in play, we may see bargain hunters start to emerge on the long end of the curve,” Mr. Liboro said. — Bernadette Therese M. Gadon with Bloomberg