Borrowing costs

Government debt yields rise as central bank raises borrowing costs

YIELDS on government securities (GS) rose across the board last week after the Bangko Sentral ng Pilipinas (BSP) raised benchmark rates to contain rising prices.flation.

GS yields, which move opposite to price, have jumped an average of 17.45 basis points (bps) week over week, based on PHP Bloomberg Valuation Service (BVAL) benchmark rates as of May 20. on the Philippine Dealing System website.

Debt yields across all benchmark maturities climbed last week. Short-term 91, 182 and 364 day Treasury bill rates rose 8.83 basis points, 7.81 basis points and 5 basis points to end the week at 1.4627%, 1.7553 % and 2.0119% respectively.

At the bottom of the curve, yields on two-, three-, four-, five- and seven-year Treasury bills (T-bonds) rose 32.7 bps, 27.5 bps, 22.21 bps, 20.2 bps and 22.05 bps, at 4.0380%, 4.8096%, 5.4452%, 5.9256%, and 6.3589%, respectively.

In the long term, 10, 20 and 25-year paper rates rose by 17.19 basis points (to 6.416%), 15.1 basis points (6.5354%) and 13.31 basis points ( 6.5342%), respectively.

Trading volume last week decreased to 7.105 billion pesos from 10.705 billion pesos previously.

First Metro Asset Management, Inc. (FAMI) said trading volume remained light last week with yields trending higher ahead of the BSP’s expected rate hike.

“The overall defensive stems from higher inflation expectations and a sustained level of debt supply,” FAMI said in an email.

“BSP raised its policy rates to reduce demand and contain inflation. Given the lagffeffects of monetary policy movements, central banks are challenged to find a balance between controllingflation and not hamper growth,” added FAMI.

Noel S. Reyes, chief investment officer of Security Bank Corp.’s Trust and Asset Management group, said in an email: “The market was pricing in higher returns [last] week at the beginning given the strong GDP (Gross Domestic Product)… which made a BSP decision very likely at this week’s meeting to contain future inflation.

Mr Reyes said last week’s trading was mostly focused on end-users “as dealers try to stay light-hearted in the face of heightened uncertainty about the yield cap”.

As predicted by eight of the 17 analysts interviewed by Business worldThe central bank’s monetary board began rolling back its pandemic-era support for the economy on Thursday by raising benchmark rates by 25 basis points to stifle a rise inflation.

The central bank will also redefine its bond purchases in a regular liquidity facility that will ensure the sustainability of its balance sheet.

At last week’s meeting, PASB revised itsflation forecast this year at 4.6% vs. 4.3% previously, above the target range of 2-4%. The central bank also raised its inflation forecast for 2023 to 3.9% from 3.6%.

“With inflation risks dominating the market, we believe the peso yield curve will rejoin the downtrend-fltrending up (short-term rates are rising faster than long-term rates) as the central bank prepares to increase further and reduce GS purchases,” FAMI said.

For the coming weeks, the trend for a flatter yield curve will remain in focus, tracking U.S. Treasury yields, Reyes said.

“Note that curve inversion should not be in our chart given our expected strong GDP performance. Stagflation is not in our forecast for the Philippines and the slope of our curve should not be as fllike the United States,” he said.

Mr Reyes added that the market will try to move higher after the average rate of seven-year paper auctioned off last week exceeded 6%.

The Treasury raised only 20.1 billion pesos of the 35 billion pesos programmed via the new seven-year T-bonds it offered last week despite bids hitting 46.94 billion pesos as investors demanded higher yields on expectations of a BSP rate hike.

The tenor was partially assigned at 6.5%, 31.1 basis points higher than the 6.189% quoted for seven-year paper in the secondary market prior to the auction. The government capped bids at 6.6%.

“Speculative talk of a 7% 10-year (bond) auction abounds, but that will just be dismissed by the BTr (Treasury Office), probably,” Mr Reyes said.

The Treasury is expected to offer a reissued 10-year debt worth 35 billion pesos on May 24. The paper has a remaining life of nine years and eight months. — AOA Tirone