Government debt yields end mixed after BSP signal and June borrowing plan

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RETURNS on Government Securities (GS) were mixed last week following the latest signal from the Bangko Sentral ng Pilipinas (BSP) to raise the cost of borrowing again next month and the higher borrowing plan of June.

Debt yields, which move opposite to prices, rose 3.23 basis points (bps) on average week over week, based on benchmark rates from the PHP Bloomberg Valuation Service to May 27 published on the Philippine Dealing System website.

Returns at all levels ended mixed. On the short end of the curve, 91-day papers fell 0.94 basis points (bp) to 1.4533%, while 182- and 364-day Treasury bills (T-bills) rose 0.94 basis points (bps) to 1.4533%. 1.28 bp and 2.82 bp to recover 1.7681% and 2.0401%, respectively.

Rates at the bottom of the curve saw mixed results, with two- and three-year Treasury bills (treasury bonds) rising slightly by 8.60 basis points (to 4.1240%) and 0.25 basis points base (4.8121%), respectively. At the same time, four-, five- and seven-year Treasury bills fell 8.15 basis points (to 5.3637%), 12.33 basis points (5.8023%) and 0.62 basis points ( 6.3527%).

In contrast, the long end of the curve moved up as yields on 10-, 20- and 25-year debt securities rose 28.28 basis points (to 6.6988%), 7. 58 basis points (at 6.6112%) and 8.81 basis points (at 6.6223%), respectively.

The total volume of GS reached 13.677 billion pesos on Friday, higher than 7.105 billion pesos seen on May 20.

“The offer/offer gap remains very wide [last week]. Aggressive debt offering kept speculators at bay, limiting secondary market action,” a bond trader said in an email.

“To some extent, portfolio demand provided support at these attractive levels. BSP Outgoing Governor’s Advice [Benjamin E.] Diokno that a rate hike is possible next June was ignored as this was fully priced in,” the bond trader added.

“It’s always better to stock up on bidding as the BTr (Office of the Treasury) looks quite aggressive to award higher in June.”

On May 19, the Monetary Board raised the policy rate by 25 basis points (bp) to 2.25%. The BSP raised its policy rate to control the surge in inflation.

Rates on deposit and overnight lending facilities were also raised by 25 basis points to 1.75% and 2.75%, respectively.

Last Thursday, the central bank chief signaled that he was inclined to raise policy rates by another quarter of a percentage point at the next policy meeting on June 23.

The BTr plans to borrow 250 billion pesos on the domestic debt market in June, 25% more than the 200 billion pesos it had programmed for May. The government just borrowed 141.31 billion pesos this month.

In detail, the Treasury will offer 15 billion pesos and 35 billion pesos in its weekly treasury bill and treasury bond auctions in June.

“There have been downward movements in the belly of the curve [last week] due to some market positioning ahead of next week’s BTr auction on these durations,” another bond trader said in an email.

The No. 2 bond trader added that the increase in GS volume traded last week compared to two weeks ago could be attributed to investors staying away ahead of rated market developments.

For this week’s trading session, the leading bond trader sees low GS returns on the three- and five-year zone due to incoming debt supply.

“The 10-year zone will trade sideways and be well bid, 5 basis points lower. Yields to consolidate, probably a bit higher on the 3-5 year zone. BTr borrowing behavior for June and May, inflation exceeding 5% is already built into the price.

For the second bond trader, domestic yields could rise as upbeat US jobs data could further support hawkish US monetary policy views and ease global growth concerns.

“However, the increase in local yields could be capped by the political uncertainties of the next Philippine administration,” added the second bond trader. — AMP Yraola

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