July 24, 2022

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Yields on government securities mixed

By Abigail Marie P. Yraola, Researcher

YIELDS on government securities (GS) were mixed last week, with the central bank’s hawkish turn still affecting the market and following the results for the 10-year bond auction of the Bureau of the Treasury (BTr) last week.

GS yields, which move opposite to prices, increased by 6.91 basis points (bps) on average week on week, based on PHP Bloomberg Valuation Service Reference Rates as of July 22 published on the Philippine Dealing System’s website.

Rates at the short end of the curve went up, with the 91-, 182- and 364-day Treasury bills (T-bills) rising by 19.51 bps, 11.98 bps, and 26.61 bps to fetch 2.1364%, 2.7365%, and 3.137%, respectively.

The belly of the curve ended mixed. The two- and three-year Treasury bonds (T-bonds) went up by 14.16 bps (to 4.826%) and 3.05 bps (5.3035%), respectively. Meanwhile, the four-, five-, and seven-year T-bonds dropped by 3.48 bps (5.6958%), 4.88 bps (6.0175%), and 2.57 bps (to 6.4623%).

On the other hand, the long end of the curve moved upwards as yields on the 10-, 20-, and 25-year debt papers rose by 1.38 bps (6.8079%), 5.30 bps (6.8934%), and 4.93 bps (6.884%), respectively.

Total GS volume traded more than doubled to P10.693 billion on Friday from P5.039 billion seen on July 15.

“The curve continued to flatten and remains an offshoot of short-term rates being pressured with central bank policy-raising actions to address inflation (direct and indirect via the exchange rate) that is expected to still rise,” Security Bank Corp. Chief Investment Officer for Trust and Asset Management Group Noel S. Reyes said in an e-mail.

Mr. Reyes added that the flat curve seen shows an increasing preference for long maturities, which have reached “attractive” yields at the near 7% levels.

Similarly, a bond trader said in a Viber message that the market focused on the government’s “successful” 10-year bond auction.

“After the auction, yields dropped. As a result, investors try to add to their positions as current levels are good for yield pickup,” the bond trader added.

The bond trader said the week-on-week drop seen in the four-, five- and seven-year bonds was due to the auction, which also affected risk sentiment for other tenors.

The trader added that trading volume improved compared to the previous week largely due to increased interest in the 10-year bond and other long-tenored papers.

The Bangko Sentral ng Pilipinas (BSP) unexpectedly raised its benchmark interest rates by a record 75 bps in an off-cycle meeting on July 14 to temper soaring inflation.

BSP Governor Felipe M. Medalla has also said he would not rule out another rate hike when the central bank meets on Aug. 18.

Meanwhile, the government last week raised P35 billion as planned from its offer of reissued 10-year securities that have a remaining life of nine years and 11 months. Total bids reached P123.32 billion or more than thrice the amount on the auction block.

Rates awarded ranged from 6.8% to 6.89%, bringing the average yield for the bonds on offer to 6.865%, down by 28 bps from the 7.145% average and by 38.50 bps from the 7.25% coupon fetched for the series when it was first offered on June 21.

To accommodate the strong demand seen for Tuesday’s offering, the Treasury opened its tap facility to raise P20 billion more via the bonds for a yield-to-maturity of 6.865%.

For this week, the bond trader said the market will monitor the result of the US Federal Reserve’s policy meeting on July 26-27 and the BSP’s reaction to it.

“[This] week, should see consolidation, but pockets of buying should start to grow further given a large number of institutional and end accounts are still long on cash,” Mr. Reyes said.