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November 22, 2017 | MANILA, PHILIPPINES
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   yield tracker
Date posted: Monday, November 21, 2016 | Manila, Philippines

Yields rise on increased inflation expectations

GOVERNMENT SECURITIES (GS) moved upwards on average last week following increased inflation expectations both in the US and at home following the former’s increased chances of monetary tightening by the US Federal Reserve and the latter’s latest better-than-expected economic report. During the week, GS yields increased by 24.01 basis points (bps) on average, data from the Philippine Dealing & Exchange Corp. as of Nov. 18 showed.

In the secondary market, rates on these debt papers are up almost across the board. In the short-end of the yield, rates on the 91-, 182- and 364-day Treasury bills jumped 26.43 bps (1.8179%), 40.81 bps (3.0804), and 40.18 bps (3.6429%).In the belly, yields on the 3-year tenor rallied, going down 22.66 bps to fetch 3.5680% while the rest of the Treasury bonds (T-bonds) went the opposite direction. The 2-, 4-, 5-, and 7-year T-bonds all rose 33.96 bps (3.4594%), 63.85 bps (4.0629%), 54.64 bps (4.6964%), and 6.97 bps (4.8286%).

Meanwhile, the long end of the yield curve saw the rates on the 10-year debt paper go down by 40.11 bps to yield (4.5400%) while the 20-year T-bond yields increased 36.07 bps (5.4482%).

“GS yields initially increased this week due to expectations that Mr. Trump’s stimulative economic policies could fuel US inflation and lead to a faster pace of monetary tightening by the US Federal Reserve,” an economist from a local bank said. GS yields were barely changed last Wednesday, the economist pointed out, but then surged again on Thursday due to the better-than-expected third quarter economic growth figures.“(Last) Friday’s decline went against the hawkish signals of Fed Chair Janet Yellen and the upbeat inflation report of the US. She recently hinted that the US central bank remained on track to raising interest rates next month, despite (President-elect Donald J.) Trump’s unexpected victory,” the economist added.

“The country’s robust economic activity last quarter bolstered views of rising domestic inflation.”

Carlyn Therese X. Dulay, vice-president and head of Institutional Flows Desk of Security Bank Corp.’s Treasury Group, was of the same opinion, noting higher yields at last Monday’s Treasury bill auction.

“Market participants are also defensive due to the 96% chance of a Fed rate hike in December and to the weakening peso. Expect rates to remain range bound in the near term,” Ms. Dulay said, referring to a poll by Bloomberg on traders. Traders said the market has now priced in a 96% chance of the US central bank tightening policy when it meets on Dec. 13-14 to bring the Fed rate up by 25 basis points, citing Bloomberg’s World Interest Rate Probability, compared to CME Group’s FedWatch program that showed only a 91% chance.

Reuters reported that Ms. Yellen clarified that Mr. Trump’s victory has done nothing to change the Fed’s plan of raising interest rates “relatively soon.”

The Fed chief added that the US central bank could change its outlook for the borrowing costs, in step with the new administration’s policies on boosting infrastructure spending to drive the US economy, which will mean higher inflation and in turn, support the central bank’s decision of hiking rates next month.

On the local space, the country’s gross domestic product grew 7.1% in the third quarter with the industry sector’s 8.6% leading the way on the supply side followed by the service sector’s 6.9% and agriculture’s surprising 2.9%. Capital spending fueled expansion the most in the expenditure side, growing by 20% supported by sustained household consumption. Meanwhile, the Bureau of the Treasury was only able to raise P12.4 billion in fresh funds out of the planned P20-billion borrowing at last Monday’s T-bills auction after partially awarding the six-month debt papers and rejecting all tenders for the one-year notes as bids for the longer-termed T-bills were higher than the government was willing to accept. Looking forward, the economist said GS yields might show an “upward bias as traders digest Fed Chair Yellen’s hawkish remarks” as well as the upbeat US inflation report in October 2016.“The likely hawkish tone of the US policy meeting minutes could also push GS yields higher, but any resulting upward drift might be minimal, as the excerpts of the meeting might simply support established views rather than provide something new.”

For Security Bank’s Ms. Dulay: “Expect rates to remain range bound in the near term.”

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