Debt yields rise as market eyes US-Iran peace talks

YIELDS on government securities (GS) ended mostly higher last week as longer tenors rose amid lingering uncertainty over peace talks between the United States and Iran, and with players positioning before the release of June Philippine inflation data.

GS yields, which move opposite to prices, rose by an average of 6.93 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of July 4 published on the Philippine Dealing System’s website.

Rates declined across the short end of the curve as the 91-, 182-, and 364-day Treasury bills (T-bills) fell by 6.83 bps, 4.35 bps, and 2.84 bps week on week to 5.1237%, 5.5307%, and 5.9477%, respectively.

Meanwhile, yields at the belly and long end of the curve closed higher week on week. The rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) climbed by 2.5 bps (to 6.3436%), 5.9 bps (6.5484%), 8.26 bps (6.7114%), 10.07 bps (6.8291%), and 14.06 bps (6.9795%), respectively.

The 10-, 20-, and 25-year tenors also went up by 21.97 bps (to 7.1482%), 13.79 bps (7.0377%), and 13.72 bps (7.0356%), respectively.

Bond yield movements were driven by Middle East developments, domestic inflation concerns, and US Treasury yields, said Melani C. Pisiao, head of the Treasury Trading Department at Bank of Makati (A Savings Bank) Inc.

“Early in the week, renewed US-Iran tensions and concerns over potential disruptions in the Strait of Hormuz lifted oil price and inflation expectations, prompting a cautious tone in the local bond market. As a result, yields moved higher across most tenors,” Ms. Pisiao said in a Viber message.

“However, reports of renewed US-Iran talks later in the week helped stabilize sentiment and reduced some of the geopolitical risk premium. Despite this, the market remained defensive as investors continued to assess the impact of higher energy prices, domestic wage adjustments, and the upcoming inflation release.”

Iran and the United States concluded a round of indirect talks on Wednesday with no sign they had made headway toward a lasting peace, focusing instead on issues that they said had been resolved when an interim agreement was announced two weeks prior, Reuters reported.

Sources familiar with the discussions said negotiators for the two countries spent two days in Doha discussing maritime traffic in the Strait of Hormuz and unfreezing Iran’s funds, two critical issues under the initial agreement.

The next meeting will take place after funeral processions for Iran’s late Supreme Leader Ayatollah Ali Khamenei, who is due to be buried on July 9, Qatar’s Foreign Ministry said.

GS yields moved mostly higher on persistent concerns over elevated Philippine inflation, a bond trader said. “The market particularly took note of the latest BSP’s (Bangko Sentral ng Pilipinas) inflation outlook that headline inflation could remain elevated for June at the 6% level. While yields reacted to developments on the US-Iran conflict on a daily basis, its amount of favorable downward transmission to local inflation remains highly uncertain.”

“Market positioning remains defensive and selective ahead of the June inflation release and key US labor indicators. With the BSP projecting June inflation in the 6%-7% range and the recent NCR (National Capital Region) wage increase potentially adding to price pressures, many participants prefer to keep risk exposure light,” Ms. Pisiao said.

June inflation data will be released on Tuesday (July 7). A BusinessWorld poll of 18 analysts yielded a median estimate of 6.6% for June inflation, slower than the 6.8% recorded in May but faster than the 1.4% in the same month last year.

This is within the BSP’s 6%-7% forecast. If realized, June inflation would ease for a second straight month and would be the slowest since the 4.1% recorded in March.

However, it would also be the fourth consecutive month that the consumer price index would breach the BSP’s 2%-4% tolerance band.

For this week, the June inflation report would be the key catalyst for the market, both analysts said.

“Market participants have already anticipated the elevated inflation reading for June. However, bond yields might move significantly lower should the headline figure continue to decelerate and confirming the downward movement recorded in May,” the bond trader said. “Market players are likely to take both the domestic inflation and labor reports next week, as these releases in conjunction are seen to confirm whether the BSP would need to remain hawkish in its future policy actions.”

“Trading activity is expected to remain two-way, with investors favoring shorter-duration positions or selectively adding exposure on yield spikes while awaiting clearer guidance on the inflation outlook and the BSP policy path,” Ms. Pisiao added.

She said traders will also monitor the Bureau of the Treasury’s GS auctions this week, along with US-Iran talks and policy hints from the US Federal Reserve. — Pierce Oel A. Montalvo with Reuters