Yields on gov’t debt drop on faster July inflation

YIELDS on government securities (GS) traded in the secondary market declined last week following the result of the 3.5-year bond auction and as July headline inflation hit a near four-year high.

Bond yields, which move opposite to prices, fell by an average of 17.03 basis points (bps) week on week, according to the PHP Bloomberg Valuation Service Reference Rates as of Aug. 5 published on the Philippine Dealing System’s website.

Rates on all tenors across the curve fell week on week at the end of trading last Friday except for the 364-day Treasury bills (T-bills), which increased by 9.18 bps to fetch 3.3693%.

Yields on the 91- and 182-day T-bills declined by 14.53 bps and 1.47 bps, respectively, to 2.123% and 2.871%.

At the belly, the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) saw their rates drop by 18.96 bps (to 4.636%), 19.1 bps (5.0083%), 19.53 bps (5.2949%), 20.76 bps (5.5105%), and 24.38 bps (5.8179%), respectively.

Similarly, yields on the 10-, 20-, and 25-year papers decreased by 15.51 bps, 31.64 bps, and 30.58 bps, respectively, to fetch 6.1379%, 6.5819%, and 6.5638%.

“In the early part of the week, we saw buying interest from end-users, pushing yields down. Especially after the well-received auction last [Tuesday]. However, profit-taking ensued ahead of the CPI (consumer price index) report (and after),” bond trader said in a Viber message.

“GS market rallied as markets reassessed the US Federal Reserve’s dot plot. More hawkish rhetoric from Bangko Sentral ng Pilipinas (BSP) also gave traders hope that inflation would eventually slow,” Senior Economist Nicholas Antonio T. Mapa of ING Bank N.V. Manila said in an e-mail.

The Bureau of the Treasury (BTr) raised P35 billion on Tuesday as planned from its sale of fresh 3.5-year T-bonds maturing on Feb. 4, 2026, with total bids for the tenor reaching P106.32 billion or more than thrice the amount on the auction block.

The debt papers were awarded at a coupon of 5.25%, 11.3 bps lower than the 5.363% recorded for the seven-year bonds maturing on Feb. 14, 2026 but 23.9 bps below 5.489% seen for the four-year tenor in the secondary market before the auction on Tuesday.

Accepted yields hovered between 5% and 5.25%, with an average rate of 5.153%.

Meanwhile, the Fed has raised its key rates by 225 bps this year to tame rising inflation in the world’s largest economy. Fed officials have also signaled another aggressive hike at their Sept. 20-21 policy meeting.

Back home, preliminary data from the Philippine Statistics Authority on Friday showed the CPI surged by 6.4% year on year in July due to faster increases in food and transport costs.

July’s headline inflation print was the fastest in nearly four years or since the 6.9% in October 2018.

Year to date, inflation averaged 4.7%, lower than the 4% seen in the same period last year. This was also lower than the 5% forecast of the central bank but already above its 2-4% target range for the year.

BSP Governor Felipe M. Medalla last week said the BSP has room to raise interest rates further while continuing to support the economy’s recovery. He has signaled an increase of 25 bps or 50 bps in their Aug. 18 meeting and said further increases would be data dependent.

The Monetary Board has hiked benchmark rates by a total of 125 bps so far this year, including the massive 75-bp increase in an off-cycle move last month, to temper rising inflation expectations.

Analysts see the upward pressure on GS yields this week.

“Given higher CPI, the 50 bps hike on Aug. 18 is almost a certainty. This expectation may put upward pressure on yields,” the trader said.

“We also have the GDP (gross domestic product) data coming up, which will probably give more reasons for BSP to hike aggressively,” the trader added.

A BusinessWorld poll of 18 economists last week yielded a median estimate of 7.5% for second quarter GDP growth. If realized, this would be slower than the 8.3% expansion in the first quarter and the 12.1% in the April to June period last year.

“We could see a correction [this] week after latest inflation print and expectation that inflation has not yet peaked. BTr borrowing also to drive direction after recent debt numbers showed government has limited fiscal space,” Mr. Mapa said.

Preliminary data from the Treasury showed the National Government’s outstanding debt hit a record high of P12.79 trillion as of end-June. — L.O. Pilar