EconomyEditor's PickYields go up on hawkish Fed

September 4, 2022

YIELDS on government securities (GS) rose across the board last week as the US Federal Reserve signaled continued aggressive monetary policy to control inflation.

GS yields, which move opposite to prices, at the secondary market rose by an average of 13.58 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Sept. 2, published on the Philippines Dealing System’s website.

The short end of the curve increased week on week as the rates on the 91-day, 182-day, and 364-day Treasury bills (T-bills) rose by 23.83 bps, 7.88 bps, 8.26 bps, respectively, to 2.383%, 3.3304%, and 3.8911%.

The belly of the curve likewise climbed as the yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) went up by 17.95 bps (4.7848%), 13.21 bps (5.0753%), 12.44 bps (5.3769%), 13.69 bps (5.6589%), and 15.15 bps (6.0158%).

The long end of the curve rose, with the rates of the 10-, 20-, and 25-year papers adding 22.50 bps, 7.03 bps, and 7.39 bps to 6.2395%, 6.6494%, and 6.6412%, respectively.

GS volume on Friday reached P10.298 billion, higher than the P7.967 billion recorded on Aug. 26.

First Metro Asset Management, Inc. (FAMI) attributed the higher rates seen last week to Fed Chair Jerome H. Powell’s hawkish remarks.

“The Fed’s aggressiveness in taming inflation increased the likelihood of a 75-bp rate hike in the next policy meeting given still resilient economic data in the US. Global sentiment spilled over to our highly defensive market as the Fed rejected the public’s speculation that they will begin cutting rates early next year,” FAMI said in an e-mail interview.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said GS yields climbed following hawkish Fed signals and the continued weakening of the peso.

“PHP BVAL yields were mostly higher for the second straight week by as much as 0.15-0.27 bps after the new record high for the dollar-peso (new intraday high of P56.90 and closed at the record P56.77) that could increase the aggressiveness of local policy rate hikes (from the current 3.75%), also partly due to more hawkish signals from Fed officials recently,” Mr. Ricafort said in an e-mail.

Mr. Powell said at the Fed’s Jackson Hole symposium on Aug. 26 that the US central bank will hike interest rates as needed and keep them high for some time to combat rising inflation.

The US central bank has raised interest rates by 225 bps since March.

Meanwhile, the peso dropped to an all-time low of P56.77 against the greenback on Friday. This surpassed the previous record of P56.45 last seen on Oct. 14, 2004.

For this week, FAMI expects the yield curve to steepen as the traders are expected to become defensive following the BTr’s issuance of retail Treasury bonds (RTBs).

The government raised a total of P420.448 billion from the 5.5-year retail bonds it offered from Aug. 23 to Sept. 2, with a record P108.517 billion coming from the bond exchange program. The RTBs, which carry a coupon of 5.75%, will be issued on Sept. 7.

“One thing to watch out for guidance for… is the data on US August nonfarm payrolls, which Fed Chair Powell has indicated to be one of the deciding factors on their policy move,” FAMI added.

The US Labor Department’s employment report released on Friday showed nonfarm payrolls increased by 315,000 jobs last month after surging 526,000 in July, marking the 20th straight month of job growth.

Mr. Ricafort said the upcoming August inflation report, which will be released by the Philippine Statistics Authority on Tuesday, will also drive trading this week. — M.I.U. Catilogo

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