Debt yields edge lower

YIELDS on government securities (GS) traded in the secondary market edged lower last week as demand for bonds picked up, with cautious sentiment before key central bank meetings offsetting gains after US economic data on labor and inflation reinforced views of a hawkish US Federal Reserve.

GS yields, which move opposite to prices, dropped 1.42 basis points (bps) on average week on week, based on PHP Bloomberg Valuation Service Reference Rates data as of June 11 published on the Philippine Dealing System’s website.

At the short end of the curve, yields on the 91-, 182-, and 364-day Treasury bills (T-bills) increased by 5.48 bps, 8.61 bps and 4.26 bps week on week to 5.011%, 5.4506% and 6.107%, respectively.

Meanwhile, at the belly, yields went down across all tenors. The two-, three-, four-, five-, and seven-year Treasury bonds (T-bond) saw their rates decline by 4.94 bps (to 6.7681%), 7.15 bps (6.9977%), 7.84 bps (7.1676%), 8.4 bps (7.2874%), and 5.45 bps (7.4308%), respectively.

At the long end, rates were mixed. The 20- and 25-year debt papers rose by 1.64 bps (to 7.6129%), and 1.81 bps (7.6138%), respectively. Meanwhile, the 10-year bonds decreased by 3.59 bps to yield 7.4934%.

GS volume traded reached P56.19 billion as of June 11, lower than the P21.7 billion recorded the week prior. Philippine markets were closed on June 12 (Friday) for Independence Day.

Marco Antonio C. Agonia, an economist at the University of Asia and the Pacific, said yield movements were “relatively mild” amid softer crude oil prices, the peso’s recovery, and as the market continued to price in the lower-than-expected Philippine inflation reading for May.

“Local yields initially shifted a tad higher after a strong US nonfarm payrolls report, reinforcing higher-for-longer Fed rate expectations as well as the partially awarded auctions result,” he said in an e-mail.

“However, bond purchasing appetite later rallied, especially for mid-dated tenors, with softer oil prices and peso-dollar rate relief. Significant yield downside was likely capped by hawkish BSP (Bangko Sentral ng Pilipinas) and Fed soundings.

“The strong US labor and inflation report for May reinforced market views that the Fed’s next move could be towards a rate hike,” a bond trader likewise said in a Viber message.

The trader added that the lower Philippine unemployment rate for April fueled optimism on the economy’s recovery prospects, which also affected yield movements.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message that the slight decline last week reflected a correction amid easing inflation concerns, but also cautiousness before the BSP and Fed policy meetings this week.

“(T)he markets anticipate the next BSP rate-setting meeting on June 18, 2026, where the BSP is still expected to raise policy rates to be not behind the curve, at the very least, in managing inflation and inflation expectations and fulfilling the mandate of price stability and bring back inflation eventually back to the BSP target of 2%-4%,” he said.

Philippine headline inflation cooled to 6.8% from 7.2% in April, the government reported earlier this month. A BusinessWorld poll of 16 economists had yielded a median estimate of 7.9% for the May headline print, while the central bank saw it settling between 7.1% and 7.9%.

Despite the slower print, this marked the third straight month that the consumer price index was above the BSP’s 2%-4% tolerance band. It also pushed the five-month average to 4.5%, already past this range.

BSP Governor Eli M. Remolona, Jr. earlier said they could take a more aggressive stance to rein in inflation and second-round price effects.

The Monetary Board will meet to review its policy settings on Thursday (June 18). A BusinessWorld poll of 20 analysts showed that 19 expect a second straight rate hike this week, with 15 seeing a 25-bp bump and four penciling in a bigger 50-bp increase amid persistent price pressures.

Meanwhile, US consumer inflation increased at its fastest pace in three years in May, boosted by surging prices for energy products amid the Middle East conflict, and giving more ammunition for the Federal Reserve to keep interest rates unchanged into 2027, Reuters reported.

The third straight month of strong increases in the consumer price index (CPI) reported by the Labor department on Wednesday underscored the mounting pressure on households, that are increasingly tapping their savings to fund spending.

The consumer price index increased 4.2% in the 12 months through May, the largest gain since April 2023, the Labor department’s Bureau of Labor Statistics said. The CPI advanced 3.8% year-on-year in April and rose 3.3% in March. Prices increased 0.5% over the month after climbing 0.6% in April. The rise in inflation was in line with economists’ expectations.

The US central bank tracks the personal consumption expenditures price indexes for its 2% inflation target. All inflation measures are running well above the Fed’s target.

Following news that the economy posted a third successive month of above-expectations job growth in May, financial markets started pricing in a rate hike. The CPI report, however, suggested the oil price shock was not yet spilling over to the broader economy, and remained mostly confined to the transportation sector. There were also signs that the pass-through from import tariffs was fading.

Economists continued to believe the bar remained high for monetary policy tightening. They expected the Fed to leave its benchmark overnight interest rate in the 3.5%-3.75% range at their June 16-17 meeting, but ditch its easing bias.

Excluding the volatile food and energy components, the CPI increased 2.9% year on year in May after rising 2.8% in April.

The so-called core CPI gained 0.2% over the month after rising 0.4% in April. The slowdown reflected a 1.7% drop in motor vehicle insurance, the largest decline since October 2020.

For this week, the bond trader said the key drivers would the Fed and BSP policy meetings, which traders would likely monitor for potential hints on their future actions.

“Markets will closely scrutinize BSP’s and Fed’s policy meetings, where we see a 25 bps hike in the former and a hold for the latter as inflation concerns continue to occupy central bankers’ policy calculus. Any significant deviations from market expectations may induce volatility in the face and belly,” Mr. Agonia said.

“Traders will also continue assessing Middle East events and its resulting impact on oil prices.” — Abigail Marie P. Yraola with Reuters