Yields on Philippine government securities (GS) traded in the secondary market ended lower last week, as July headline inflation came in below expectations and weaker-than-expected second-quarter economic growth dampened prospects of further monetary tightening.

GS yields, which move inversely to prices, declined by 13.36 basis points (bps) on average week on week, according to the PHP Bloomberg Valuation Service Reference Rates as of Aug. 7, published on the Philippine Dealing System's website.

At the short end of the curve, yields were mixed. The 91-day Treasury bill (T-bill) rate rose by 0.77 bp to 5.0342%, while the 182- and 364-day T-bill rates dropped by 9.01 bps and 8.51 bps to 5.436% and 5.8636%, respectively.

At the belly of the curve, rates fell across all tenors. Yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) declined by 18.57 bps to 6.5158%, 19.6 bps to 6.8165%, 20.81 bps to 7.0007%, 22.06 bps to 7.1053%, and 23.28 bps to 7.2002%, respectively.

Long-end tenors also ended lower. The 10-, 20-, and 25-year debt paper rates dropped by 15.96 bps to 7.2703%, 4.78 bps to 7.4936%, and 5.15 bps to 7.4921%, respectively.

GS trading volume reached P43 billion as of Aug. 7, up from P28.46 billion a week earlier.

"The GS market reacted positively to the softer CPI (consumer price index) data as yields traded lower by 10-12 bps. The July print was not as high as people expected and is a welcome sight given the mounting CPI fears," a bond trader said.

Philippine headline inflation eased to 6.2% in July from 6.4% in June, marking the slowest pace in four months or since 4.1% in March. The July figure fell within the Bangko Sentral ng Pilipinas' (BSP) 5.6%-6.6% forecast range and came in below the 6.4% median estimate in a BusinessWorld poll of 21 economists and analysts. Even so, inflation remained well above the BSP's 2%-4% target band, which the central bank has consistently cited as the guiding threshold for its policy stance.

The bond trader also noted that slower gross domestic product (GDP) growth in the second quarter contributed to the decline in yields. "The weaker-than-expected GDP print is very supportive for duration. The slower growth of 2.3% in the second quarter could ease some rate hike fears moving forward."

The second-quarter GDP growth of 2.3% — a new post-pandemic low — was slower than the 5.4% expansion recorded in the same quarter a year ago and the 2.8% growth in the first quarter. It also fell below the median estimate of 2.8% in a BusinessWorld poll of 21 economists and analysts. The figure also lagged behind most of the Philippines' Southeast Asian peers, whose second-quarter growth readings had generally come in higher, underscoring the divergence between domestic momentum and regional trends. First-half economic growth stood at 2.6%, well below the government's 3.5%-4.5% full-year target.

"Bond yields are starting to move lower as the market responds to slowing economic growth. Simply put, concerns over growth are now outweighing concerns over inflation," Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said in a Viber message.

He described the central bank's current situation as a "balancing act," adding: "I think price stability comes first. Higher-for-longer rates [will] stay until we see it (inflation) back closer to 4%."

The Monetary Board in June raised benchmark interest rates by 25 bps for a second consecutive meeting, bringing the policy rate to 4.75%. Three more policy reviews are scheduled this year on Aug. 27, Oct. 22, and Dec. 17. Market participants are widely watching the Aug. 27 meeting for signals on whether the BSP will pause its tightening cycle or deliver another hike, with the growth and inflation data shaping expectations on both sides.

The bond trader also attributed yield movements to geopolitical developments, as continued uncertainty in the Middle East fueled volatility in global markets.

"Liquidity is prevalent in the market, as evidenced by the strong auction showing. It is likely that any upticks could be met with demand in the local bond space," the trader added.

On Tuesday, the Bureau of the Treasury borrowed P30 billion as planned from the reissued 20-year bonds, with total tenders reaching P93.799 billion — more than three times the amount on offer.

Looking ahead to this week, both analysts said yields may move sideways to lower as the market continues to factor in the latest economic data.

"I expect the GS market to remain supportive given the favorable macroeconomic environment. Any upticks should be capped for now," the bond trader said. — S.M.E. Sancap