Philippine Government Debt Yields Mixed Amid Fed and BSP Policy Speculation

Government securities yields ended mixed last week as investors weighed concerns over persistent inflation in both the Philippines and the United States, while positioning ahead of the Bangko Sentral ng Pilipinas’ upcoming policy decision.

The average yield on government securities rose slightly by 0.89 basis points week-on-week, according to the PHP Bloomberg Valuation Service Reference Rates as of August 20, published on the Philippine Dealing System’s website.

At the short end, yields on 91-day Treasury bills increased by 5.39 basis points to 5.0025%, while the 182-day and 364-day T-bill rates declined by 1.73 basis points and 5.78 basis points to 5.3212% and 5.6593%, respectively.

In the intermediate segment, yields for three-, four-, five-, and seven-year Treasury bonds rose by 1.23 basis points (to 6.6877%), 3.51 basis points (to 6.9293%), 5.03 basis points (to 7.0726%), and 3.84 basis points (to 7.2124%) respectively. The two-year bond yield decreased by 1.24 basis points to 6.335%.

On the long end, the 10-year bond yield fell by 1.67 basis points to 7.3052%, while 20- and 25-year yields edged up by 0.6 basis points and 0.63 basis points to 7.505% and 7.5025% respectively.

Trading volume reached P36.93 billion last Thursday, down from P89.06 billion the previous week. Philippine financial markets were closed on Friday for Ninoy Aquino Day.

“Yields remained largely unchanged following the release of the FOMC minutes due to mixed developments from the US overnight,” noted a bond trader via email. “The minutes revealed that more Fed officials are leaning toward a rate hike, which could exert additional upward pressure on US Treasury yields.”

“The Fed maintained a relatively hawkish stance, citing elevated inflation and high uncertainty, particularly due to the Middle East conflict. This hawkish tone presents challenges for Philippine government securities. Despite some unexpectedly softer US economic data, ongoing rate uncertainty continues to exert upward pressure on local yields,” said Melani C. Pisiao, head of Treasury Trading at Bank of Makati.

Concerns about inflation intensified at the Fed’s July policy meeting, with several officials prepared to raise interest rates and many indicating that rate hikes might be necessary if inflation does not return to the Fed’s 2% target, according to minutes released on Wednesday.

“Several” policymakers who supported a rate increase remarked that price pressures appeared broad-based and believed the Committee should adopt a more restrictive policy stance to fulfill its dual mandate of price stability and maximum employment. They warned that failing to act would risk “a steeper and potentially more costly sequence of tightening measures later.” The Fed ultimately maintained rates in the 3.5%-3.75% range at that meeting, though three members dissented in favor of a quarter-point increase.

“Many” participants assessed that policy tightening would likely be required if inflation failed to decline, according to the minutes from Chairman Kevin Warsh’s second meeting as central bank head. The minutes also showed officials beginning to discuss broader operational changes to the Fed’s structure.

Futures markets continue to price in better-than-even odds of a rate hike at the Federal Reserve’s September meeting, with a very high probability of an increase at its final meeting of the year in December.

Investors are now focusing on the BSP’s policy meeting scheduled for Thursday (August 27), where market expectations suggest a 25-basis-point rate hike for the third consecutive meeting. A BusinessWorld poll found that 19 out of 24 analysts expect the Monetary Board to raise the policy rate as inflation remains well above target.

“Market participants had been anticipating a potential BSP rate hike this month, but traders have struggled to position themselves given the mixed signals from recent statements by BSP Governor Remolona,” the bond trader explained. “While higher crude oil prices driven by Iran tensions continue to create concerns in local markets, participants are becoming increasingly worried about future domestic inflationary pressures beyond volatile energy costs. In particular, recent economic disruptions caused by extensive monsoon rains may lead to upward pressure on local food prices.”

“The BSP faces a delicate balancing act due to the weakening peso and inflation remaining above its 2%-4% target,” Pisiao added.

The Monetary Board has raised benchmark rates by a cumulative 50 basis points since April, bringing the policy rate to 4.75%.

BSP Governor Eli M. Remolona, Jr. stated last week that the central bank stands ready to adjust its policy stance as needed to bring inflation back within target range amid expanding price risks, particularly with the ongoing Middle East conflict.

This comes despite his earlier comments suggesting that weak Philippine economic growth somewhat reduces the urgency for aggressive monetary tightening.

Philippine GDP growth slowed to a post-pandemic low of 2.3% in the second quarter. For the first half of the year, the economy expanded at an average annualized rate of 2.6%, below the government’s 3.5%-4.5% full-year target.

Headline inflation decelerated to a four-month low of 6.2% in July, marking the fifth consecutive month that it exceeded the central bank’s 3% ceiling and 2%-4% comfort zone. On a year-to-date basis, average inflation stood at 5%, with the BSP projecting full-year inflation of 6.4%.

Looking ahead, both analysts expect market sentiment to remain cautious before the BSP policy review, with yields likely to trade sideways with a slight upward bias as investors await guidance on future monetary policy direction.

“Additionally, the release of the personal consumption expenditures price index on August 26 will provide further insight into the US inflation landscape and influence expectations for near-term Fed rate adjustments,” the trader noted. — Pierce Oel A. Montalvo with Reuters

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