YIELDS on government debt ended mixed last week as concerns over elevated inflation at home and in the United States kept rate-hike bets alive, while traders also positioned ahead of the Philippine central bank’s policy meeting on Thursday.

GS yields, which move opposite to prices, edged up by an average of 0.89 basis point (bp) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Aug. 20 published on the Philippine Dealing System’s website. The GS curve serves as the benchmark for pricing other peso-denominated debt, so shifts in these yields influence borrowing costs across the economy.

At the short end, the yield on the 91-day Treasury bills (T-bills) rose 5.39 bps week on week to 5.0025%, while the rates of the 182- and 364-day T-bills fell by 1.73 bps and 5.78 bps to 5.3212% and 5.6593%, respectively.

At the belly of the curve, yields ended mostly higher, with the three-, four-, five-, and seven-year Treasury bonds (T-bonds) rising by 1.23 bps to 6.6877%, 3.51 bps to 6.9293%, 5.03 bps to 7.0726%, and 3.84 bps to 7.2124%, respectively. Meanwhile, the two-year tenor slipped by 1.24 bps week on week to 6.335%.

At the long end, the 10-year tenor declined by 1.67 bps to 7.3052%, while the 20- and 25-year notes inched up by 0.6 bp and 0.63 bp to 7.505% and 7.5025%, respectively.

GS volume traded reached P38.93 billion on Thursday, down from P89.06 billion a week earlier. Philippine financial markets were closed on Friday for Ninoy Aquino Day.

Analysts said yields moved sideways as market participants positioned themselves around monetary policy expectations in the Philippines and the United States.

The release of minutes from the US Federal Reserve’s July policy meeting revived expectations of further rate hikes in the world’s largest economy after a string of softer-than-expected data.

“Yields were little moved following the release of the FOMC (Federal Open Market Committee) minutes due to mixed developments from the US overnight. The latest minutes indicated that more US policymakers are teetering toward a rate hike, which could exert further upward pressure on US Treasury yields,” a bond trader said in an e-mail.

“The Fed maintained a relatively hawkish stance, citing elevated inflation and high uncertainty, partly due to the Middle East conflict. The Fed’s hawkish tone creates a challenging environment for Philippine government securities. Even with some softer-than-expected US economic data, US rate uncertainty continues to put upward pressure on local yields,” Melani C. Pisiao, head of the Treasury Trading Department at Bank of Makati (A Savings Bank), Inc., said in a Viber message.

Concern about inflation deepened at the Federal Reserve’s meeting last month, with “several” policymakers ready to raise interest rates and “many” saying a hike in borrowing costs would be needed if inflation did not decline to the US central bank’s 2% target, the minutes of the session showed on Wednesday, Reuters reported.

Policymakers who favored a rate increase said price pressures appeared broad-based and judged that the policy-setting committee should adopt a more restrictive stance to meet its price-stability and maximum employment goals on a sustained basis, according to the July 28-29 meeting minutes. They warned that failing to do so could lead to “a steeper and potentially more costly sequence of tightening moves at a later stage.”

The Fed voted at that meeting to keep its benchmark interest rate in the current 3.5%-3.75% range, although three policymakers dissented in favor of a quarter-percentage-point hike.

A larger group of “many” participants assessed that policy tightening would likely be necessary if inflation did not decline, the minutes showed.

The minutes, covering Fed Chairman Kevin Warsh’s second meeting as head of the central bank, also showed central bankers discussing some of the broader issues he wants to pursue as part of a possible overhaul of the Fed’s operations.

Rate futures markets continued to price better-than-even odds that the Fed will begin raising rates at its Oct. 27-28 meeting and, failing that, a very high probability of a hike at its final meeting of the year in December.

The Fed is expected to keep policy steady again at its Sept. 15-16 meeting after recent data showed inflation easing slightly and firms unexpectedly shedding jobs in July. The data has left officials divided over whether rate hikes will be needed to slow inflation further, while also making them more cautious about labor market strength and the risks to their goal of maintaining full employment.

Meanwhile, the US move to stem a rout in long-dated bonds helped ease some of the global market volatility seen earlier in the week, Ms. Pisiao said.

“The announcement that the US Treasury (UST) would at least double its long-dated bond buybacks helped push UST yields lower. This provided some relief to the Philippine bond market. Philippine GS yields responded positively, with selected tenors declining by an average of 7.22 bps week on week.”

“Local bond yields also reacted from the expiration of the 60-day memorandum of understanding between US and Iran without a definitive deal to end the conflict in the Middle East. This development introduced further uncertainty in the local bond market,” the bond trader added.

At home, attention is now on the Bangko Sentral ng Pilipinas’ (BSP) policy meeting on Thursday (Aug. 27), the trader said. A BusinessWorld poll showed that 19 of 24 analysts expect the Monetary Board to raise the target reverse repurchase rate by 25 bps for a third straight meeting this week as inflation remains well above target. The reverse repurchase rate is the BSP’s key policy rate, anchoring short-term money market rates and signaling the central bank’s monetary policy stance.

“Market participants were somehow anticipating a potential BSP policy rate hike this month. However, traders have not been able to position on this projected move by the central bank. This is mainly due to mixed policy cues from the recent pronouncements by BSP Governor Remolona,” the trader said. “While higher crude oil prices brought by Iran conflict continue to raise concerns in the local bond market, participants are starting to grow wary of further domestic inflationary pressures which may reoccur in the coming months apart from volatile energy prices. In particular, the recent economic disruption due to the impact of prolonged flooding from the substantial habagat (monsoon) rainfall may exert upward pressure on local food items.”

“The BSP faces a difficult balancing act because of the weakening peso and inflation remaining above its 2%-4% target,” Ms. Pisiao added. A weaker peso raises the local cost of imported goods such as fuel and food, which can feed into overall inflation.

The Monetary Board has raised benchmark rates by a cumulative 50 bps since April, bringing the policy rate to 4.75%.

BSP Governor Eli M. Remolona, Jr. said last week that the central bank stands ready to adjust its policy stance as needed to bring inflation back to target amid broadening price risks, especially with the Middle East conflict still unresolved.

He had earlier said that weaker Philippine economic growth somewhat eases the pressure on the central bank to take aggressive action.

Philippine GDP growth slowed to a new post-pandemic low of 2.3% in the second quarter. For the first half, the economy expanded by an average of 2.6%, below the government’s 3.5%-4.5% full-year target.

Meanwhile, headline inflation slowed to a four-month low of 6.2% in July, but this was still the fifth straight month that it remained above the central bank’s 3% target and 2%-4% comfort band. Year to date, inflation has averaged 5%. The BSP expects headline inflation to average 6.4% this year.

For this week, both analysts said market sentiment may stay cautious ahead of the BSP policy review, and yields could move sideways with an upward bias as traders wait for clues on the central bank’s policy direction.

“Likewise, the release of the personal consumption expenditures inflation report on Aug. 26, which will indicate the ongoing US inflationary environment, could firm views of a near-term US policy rate hike,” the trader added. — Pierce Oel A. Montalvo with Reuters