Government debt returns mixed on inflation, Fed minutes

Returns on government securities (GS) were mixed last week following the release of March inflation data and the minutes of the last US Federal Reserve meeting.

Conversely to prices, GS yields rose by a weekly average of 1.83 basis points (bps), according to benchmark rates from the PHP Bloomberg Valuation Service for April 8, as published on the website of the Philippine Dealing System.

“We are trapped in a range as the inflation picture has a lag and will rise further from the 4% reported for March,” said Noel S. Reyes, Chief Investment Officer of Security Bank Corp. for Trust and Asset Management Group, in an e-mail interview Friday.

“Expectations remain cautious, so most volume is to service customer flows by traders, as traders remain underpositioned and tactically trade the curve against customer demand,” he said. .

Demand was still focused on shorter tenors, Mr Reyes added, but “green shoots could already be sprouting for longer tenors.”

“Hungarian statements from the US Fed have poured cold water on overbuying and tempered demand interest,” he said.

“Investors were seen repositioning themselves in the belly of the curve, seeing interest all the way to the FXTN (fixed rate treasury bill) 10-67 which yielded more than 6% at the start of the week,” First Metro Asset said. Management, Inc. (FAMI). in a separate email interview, as the market has already priced in March’s high inflation due to soaring oil prices.

“Local bond yields were also supported by corporate maturities this month as well as good participation in the BTr (Office of the Treasury) FXTN 3-27 auction which was priced at 4.25% coupon or at the lower end of market indications,” FAMI said.

Headline inflation hit a six-month high of 4% in March as higher global oil prices due to Russia’s invasion of Ukraine hit the cost of food, utilities and services. transportation, the Philippine Statistics Authority reported Tuesday.

The March inflation print matched the median forecast in a Business world poll and was near the upper end of the Bangko Sentral ng Pilipinas (BSP) forecast of 3.3-4.1% for the month.

This brought first-quarter inflation to an average of 3.4%, still within the central bank’s 2-4% target for this year and below its forecast of 4.3% for 2022.

Meanwhile, the Treasury has partially allocated the freshly issued three-year paper it offered last week as investors want higher yields as they expect the BSP to raise policy rates by now. the second half of the year.

The BTr only borrowed 25.791 billion pesos from the 35 billion peso program of the new three-year notes, even though offers totaled 53.578 billion pesos.

The tenor hit a coupon rate of 4.25%, 19.48 basis points above the secondary market yield before the auction. The Treasury capped bids at 4.37%.

On the other hand, the minutes of the Fed’s March 15-16 meeting released last week showed that it planned to raise rates by 50 basis points more aggressively, but decided on a hike of 25 basis points after taking into account the Russian invasion of Ukraine, Reuters reported. .

At the end of Friday’s session, rates on 91 to 182-day Treasury bills (T-bills) fell 1.41 bps and 1.82 bps week after week to 1.3352% and 1.5165%, respectively. One-year paper, meanwhile, rose 4.7 basis points to 1.7904%.

On the other hand, at the belly of the curve, the majority of Treasury bond rates (T-bond) fell. Yields on two-, three-, four- and five-year Treasury bills fell 2.25 basis points (to 3.3632%), 1.31 basis points (4.0606%), 3.01 basis points basis (4.6762%) and 2.61 basis points (5.1468%), respectively. Meanwhile, the seven-year paper edged up 0.13bp to 5.6284%.

The long end of the yield curve rose as 10, 20 and 25-year bond rates rose 4.23 basis points (to 6.001%), 17.50 basis points (5.7355%) and 6.03 basis points (5.6115%), respectively. .

“We could see a respite in further upside on the short end of the curve,” Reyes said. “However, as inflation remains on the table and the Fed executes its hawkish stance, we will remain range bound.”

FAMI also expects “external pressures” such as the ongoing Russian-Ukrainian conflict to affect the local bond market.

“The market could become destabilized given the signal from the Fed to reduce its balance sheet at a maximum rate of $95 billion per month as well as rapid and substantial policy rate hikes in the months ahead,” FAMI said.

“Faster clips in headline inflation are likely in the coming months as we see stronger pass-through effects from higher oil prices and peso depreciation,” he added. — Ana Olivia A. Tirona with Reuters

Comments are closed.