Debt yields go down on slower Sept. inflation --[Reported by Umva mag]

By Lourdes O. Pilar, Researcher

YIELDS on government securities (GS) fell last week amid slower September inflation and expectations of more rate cuts at home and in the United States.

GS yields, which move opposite to prices, went down by an average of 2.12 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Oct. 4 published on the Philippine Dealing System’s website.

Rates at the short end of the curve declined, with the 91-, 182-, and 364-day Treasury bill going down by 14.25 bps, 8.96 bps and 5.13 bps to yield 5.1153%, 5.2922% and 5.5086% respectively.

At the belly, yields ended mixed. Rates of the two- and three-year Treasury bonds (T-bonds) dropped by 3.68 bps (to 5.4864%) and 0.44 bp (5.5313%), respectively, while yields on the four-, five-, and seven-year T-bonds rose by 1.26 bps (to 5.5725%), 1.94 bps (5.6068%) and 2.56 bps (5.6672%), respectively.

At the long end of the curve, rates of the 10-, 20- and 25-year T-bonds went up by 1.70 bps (to 5.7576%), 0.54 bp (5.9186%) and 1.14 bps (5.9195%), respectively.

Total GS volume traded reached P53.18 billion on Friday, higher than the P47.88 billion seen on Sept. 27.

“Local bond yields declined significantly over the weekly with more notable declines on the short end as market participants anticipate stronger rate cuts from the BSP (Bangko Sentral ng Pilipinas) and the US Federal Reserve amid continued weakness in inflation,” the bond trader said in an e-mail.

“Participants nevertheless remained cautious amid the renewed escalation of geopolitical conflicts in the Middle East during the week, which sparked inflationary concerns from spike in global crude oil prices,” the trader added.

Jonathan L. Ravelas, senior adviser at Reyes Tacandong & Co., said in a Viber message that GS yields moved mostly sideways last week with a downward bias after Philippine inflation eased more than expected last month.

Headline inflation slowed to an over four-year low of 1.9% in September from 3.3% in August and 6.1% a year ago, the Philippine Statistics Authority reported on Friday.

This was below the BSP’s 2%-2.8% forecast for the month and the 2.5% median estimate yielded in a BusinessWorld poll of 15 analysts.

The September print was the slowest in over four years (52 months) or since the 1.6% print in May 2020.

In the first nine months, headline inflation averaged 3.4%, matching the central bank’s full-year forecast and well within its 2-4% annual target.

Analysts said the lower September consumer price index (CPI) gives the BSP space to bring down benchmark interest rates further.

BSP Governor Eli M. Remolona, Jr. has said the Monetary Board could slash benchmark interest rates by 50 bps more this year and deliver two more 25-bp cuts at its next two meetings scheduled for Oct. 16 and Dec. 19.

The central bank began its easing cycle in August, cutting its policy rate for the first time in nearly four years by 25 bps to 6.25% from the over 17-year high of 6.5%.

Meanwhile, Fed Chair Jerome H. Powell last week adopted a more hawkish tone in a speech at a conference in Tennessee, saying the world’s biggest central bank would likely stick with quarter-percentage-point interest rate cuts moving forward, Reuters reported.

The Fed kicked off its easing cycle with a larger-than-expected half-point reduction last month, bringing its target rate to the 4.75%-5% range.

On Friday, a stronger-than-expected jobs report reassured investors who had worried the economy may be getting too weak.

US job gains increased in September by the most in six months, and the unemployment rate fell to 4.1%, the report showed.

Traders further reduced bets on a 50-bp reduction at the Federal Reserve’s Nov. 6-7 meeting. Traders are now pricing in just an 8% chance of a 50-bp rate cut, down from around 31% earlier on Friday, the CME Group’s FedWatch Tool showed.

For this week, GS yields may continue to go down, the analysts said.

“Bond yields could decline further following the softer-than-expected Philippine inflation report and concerns over the lingering weakness in the US labor market. Moreover, expectations of dovish policy cues from the Fed minutes and softer US consumer inflation report might likewise exert downward pressure on yields,” the bond trader said.

Minutes of the Fed’s Sept. 17-18 meeting will be released on Oct. 9 (Wednesday), while September US consumer price index data will be out on Oct. 10 (Thursday.)

“Expect rates to move sideways as risks arising from geopolitical tensions caused by the strike in US ports,” Mr. Ravelas added.

US East Coast and Gulf Coast ports were reopened on Friday after dockworkers and port operators reached a wage deal to settle the industry’s biggest work stoppage in nearly half a century, but clearing the cargo backlog will take time, Reuters reported.

The strike ended sooner than investors had expected, weakening shipping stocks as freight rates were no longer expected to surge.

At least 54 container ships had lined up outside the ports as the strike prevented unloading, according to Everstream Analytics, threatening shortages of anything from bananas to auto parts. More ships are sure to arrive.

Pricing platform Xeneta said it was likely to take two to three weeks for the normal flow of goods to be reestablished.

The International Longshoremen’s Association (ILA) workers union and United States Maritime Alliance port operators announced the deal late on Thursday. Sources said they had agreed a wage hike of around 62% over six years, raising average wages to about $63 an hour from $39 an hour.

The ILA launched the strike by 45,000 port workers, their first major work stoppage since 1977, on Tuesday, affecting 36 ports from Maine to Texas. JPMorgan analysts estimated the strike would cost the US economy around $5 billion per day.

The disruption was a headache for Democratic President Joseph R. Biden’s administration ahead of the Nov. 5 presidential election pitting Democratic Vice-President Kamala Harris against Republican former President Donald Trump. It threatened to dent US employment figures in a report due to be released shortly before Election Day.

Many retailers said they had stocked early for the coming holiday shopping season, and that a short strike would likely not have much impact on availability of products.

The tentative deal on wages has ended the strike, but only extends the current contract to Jan. 15. The two sides will continue to talk about other issues, such as the ports’ use of automation that workers say will lead to job losses. — with Reuters

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