Yield on 10-year debt paper likely to hit 7.5%, says DBS

The yield on 10-year government debt paper is likely to increase to 7.5 percent in the third quarter as the effects of two policy rate hikes implemented earlier this year set in, according to DBS Bank.

This would mean an increase of 105.5 basis points from the yield of 6.445 percent recorded in April, when the Bureau of the Treasury last issued a 10-year bond.

DBS said in its latest quarterly report on Asian markets that the rate hikes implemented in March and May had made the monetary policy outlook in the Philippines “more bond un-friendly.”

These increases brought the Bangko Sentral ng Pilipinas’ overnight borrowing rate to 4.5 percent and overnight lending rate to 6.5 percent.

“Inflationary pressures have intensified to an extent that the central bank has to act to keep inflation expectations anchored,” the Singapore-based bank said.

“There is now acknowledgement that 2011 inflation may be close to 5 percent,” it added.

Even then, the Montary Board decided to keep policy rates unchanged during a meeting last week, although it raised reserve requirements on banks as another means of addressing inflation concerns.

This recent decision was contrary to dominant market expectations, with most market watchers having anticipated yet another increase of 25 basis points.

DBS, despite the expected increase in 10-year yields, said government bond yields in general will likely stay low well into the third quarter.

This is due to ample available capital currently being more of a factor in the rates outlook than inflation rates and hikes.

“Excess liquidity might remain high in the coming month, but we think that it is unlikely that yields will stay low throughout the second semester,” DBS said.

“If inflation continues to rise, the central bank will have to continue with policy tightening and yields will rise,” it added.

Data from the National Statistics Office show that inflation reached 4.5 percent year on year in May, which was at the lower end of the BSP’s expectations for that month.

Further, the bank said that the rise in yields was made more likely given government plans to borrow actively with longer-term domestic bonds – such as 10-year and 20-year paper – in the coming months.