April 24, 2017, 9:24 pm
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Higher yields for gov’t IOUs

Higher inflation rate plus the tapering in bond buying of the US government will increase yields in government securities this year according to several economists.
 
It will be a welcome relief for investors who had to bear with near zero yields from government papers last year.
 
 The start of the respite  can be seen in the first treasury bills auction for the year, with the 91-day paper posting a yield of 0.693 percent, which is 69.2 basis points higher than the near-zero average of 0.001 percent recorded in November last year, the lowest ever for the 91-day IOUs.
 
The government meanwhile rejected bids for the six-month paper, as National Treasurer Rosalia de Leon said the rates sought by investors are “out of line,” since they were much higher than secondary market rates.
 
The previous yield of the half-year securities in November was the same as that of the 91-day paper, with a record low of 0.001 percent.
 
Meanwhile the rate of the one-year treasury bills jumped by 80.1 bps to 1.079 percent during the January 6 auction.
 
In November last year, the rate of the 364-day paper was also below half a percent, at 0.278 percent.
 
Victor Abola, economist at the University of Asia and the Pacific (UA&P), said the recent rise in yields was due to the tapering of the quantitative easing program of the US Federal Reserve and the spike in inflation last December.
 
Inflation in December quickened to its highest pace in two years at 4.1 percent from 3.3 percent in November due to higher electricity charges and the spike in food prices due to supply shocks brought about by typhoon Yolanda.
 
Even with the two-year high, the country’s annual average headline inflation for the year 2013 slowed to 3.0 percent from 3.2 percent in 2012.
 
This is at the lower end of the government’s full-year target range of between 3 and 5 percent.
 
For 2014, the inflation target also ranges between 3 and 5 percent.
 
“It is a spike since I think the disruptions in the supply chain caused by Yolanda will have no more than a quarter effect,” Abola said.
 
“On the other hand, oil prices have dropped by some five percent from their recent peaks in the first full week of January, and likely to be soft for the rest of the year due to higher crude oil output of the US, Canada, and Iran,” he added.
 
Cid Terosa, also an economist at the UA&P, said he expects inflation rate to be higher this year at around 3.6 percent to 4.2 percent.
 
Terosa said higher government spending, increase in water and electricity rates, strong consumer demand, weaker peso due to the strengthening of the dollar, and food and agricultural supply disruptions could push the yields of government IOUs upward.
 
“Yes, I expect the rates (of government securities) to go up this year. (Aside from higher inflation), another factor would be developments in the USA and other developed economies,” Terosa said.
 
“Resurgence of growth in these economies can trigger higher rates for government securities,” he added.
 
UP economist Benjamin Diokno likewise expects an increase in the yields of government IOUs.
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