Gov’t debt yields end higher on hawkish Fed bets

YIELDS on government securities (GS) mostly climbed last week as investors took a defensive stance amid the holidays and amid bets on a hawkish US Federal Reserve following the release of key US economic data.

GS yields, which move opposite to prices, went up by an average of 2.86 basis points (bps) week on week at the secondary market, according to PHP Bloomberg Valuation Service Reference Rates as of Dec. 26 published on the Philippine Dealing System’s website.

Rates at the short end of the curve closed mixed. Yields on the 91- and 364-day Treasury bills (T-bills) slipped 0.62 bp to 4.8434% and 1.3 bps to 5.0317%, respectively. Meanwhile, the rate of the 182-day tenor edged up by 0.48 bp to 4.9725%.

At the belly, rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) climbed by 5.31 bps (5.3502%), 5.01 bps (5.4984%), 5.09 bps (5.6393%), 4.84 bps (5.7502%), and 4.26 bps (5.8883%), respectively.

Yields on long-term bonds also went up across the board, with the 10-, 20-, and 25-year debt papers climbing 7.49 bps (6.0539%), 0.54 bp (6.4123%), and 0.34 bp (6.4076%), respectively.

GS volume traded dropped to P25.45 billion last week from P44.87 billion previously. The market was closed on Dec. 24 and 25 for the Christmas holidays.

“Year-end holidays significantly reduced market liquidity, delaying portfolio rebalancing and positioning adjustments,” Lodevico M. Ulpo, Jr., vice-president and head of fixed income strategies at ATRAM Trust Corp., said in a Viber message.

He said benchmark yields climbed by 5-10 bps, led by the belly of the curve, last week as a “supply-driven knee-jerk reaction” the first-quarter domestic borrowing plan released by the Bureau of the Treasury (BTr).

“The market repriced near-term supply risk amid thin liquidity.”

The BTr said on Tuesday that the National Government plans to borrow up to P824 billion from domestic sources in the first quarter of 2026, or P324 billion from the issuance of T-bills and up to P500 billion via T-bonds.

“Hawkish signals from the Fed reinforced a defensive tone in local rates. Combined with illiquid year-end conditions, global yield pressure kept participants sidelined, preventing meaningful demand for duration and contributing to modest upward bias in yields,” Mr. Ulpo added.

“The upside surprise in US growth supported a bear-steepening bias, as expectations for further policy easing were pushed out. This prompted caution on the long end, with investors reassessing reflation risks and the sustainability of an easier policy path.”

Hawkish sentiment from the Fed could also affect the Bangko Sentral ng Pilipinas’ (BSP) policy path, Reinielle Matt M. Erece, an economist at Oikonomia Advisory and Research, Inc., said in an e-mail.

“While monetary policy remains on the easing path, inflation concerns may spike yields given that monetary policy may reverse its direction,” he said.

BSP Governor Eli M. Remolona, Jr. has left the door open to one final cut in 2026 to support the economy if needed, with inflation expected to remain manageable.

The US economy grew at its fastest pace in two years in the third quarter, fueled by robust consumer spending and a sharp rebound in exports, though momentum appears to have faded amid the rising cost of living and recent government shutdown, Reuters reported.

Gross domestic product (GDP) increased at a 4.3% annualized rate last quarter, the fastest pace since the third quarter of 2023, the Commerce department’s Bureau of Economic Analysis said in its initial estimate of third-quarter GDP. Economists polled by Reuters had forecast GDP would rise at a 3.3% pace. The economy grew at a 3.8% pace in the second quarter.

The Fed this month cut its benchmark overnight interest rate by another 25 basis points to the 3.5%-3.75% range, but signaled borrowing costs were unlikely to fall in the near term as policymakers await clarity on the direction of the labor market and inflation.

Investors are preparing for 2026 focused on when the US Federal Reserve might cut rates and by how much. Traders are pricing in at least two cuts over the year, but they do not expect the Fed to move before June.

The central bank has projected one more cut next year but divisions among decision makers has left investors on edge about the policy outlook.

For this week, Mr. Ulpo said the GS market may continue to move sideways as volume remains thin.

“With a shortened trading week, we expect range-bound consolidation and continued defensiveness. Investors should monitor liquidity conditions, offshore rate movements, and any signals on auction demand ahead of normalization in January,” he said.

“Next year, we should closely monitor inflation movements as well as employment. Further rate cuts may cause yields to fall, but inflation concerns may cause investors to anticipate tighter policy,” Mr. Erece added. — Isa Jane D. Acabal with Reuters