US economic data drive yield increases – Hawkish signals from the Fed cause market volatility

Last week saw a notable upward movement in government bond yields, driven by restrictive signals from the US Federal Reserve and robust US economic data. The rise in yields was clearly felt: on average, yields increased by 2.86 basis points (Bps), reflecting a defensive market positioning. Lower trading activity due to the holidays further amplified this movement.

Differentiated Development Along the Yield Curve

At the short end of the curve, a mixed picture emerged. The 91-day Treasury bills fell by 0.62 Bp to 4.8434%, while the 364-day bills declined by 1.3 Bps to 5.0317%. Conversely, the 182-day maturity saw an increase of 0.48 Bp to 4.9725%.

The yield increase was more pronounced in the mid-segment. The 2-, 3-, 4-, 5-, and 7-year government bonds rose 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.

Longer maturities also experienced continuous increases. The 10-, 20-, and 25-year debt instruments rose by 7.49 Bps (6.0539%), 0.54 Bp (6.4123%), and 0.34 Bp (6.4076%) respectively.

Reduced Trading Volume During Holiday Period

Total trading volume significantly decreased to 25.45 billion Philippine Pesos (P), compared to 44.87 billion P in the previous week. Market closures on December 24 and 25 due to Christmas, along with the overall reduced market liquidity during this period, led to a supply-driven knee-jerk reaction.

Fed Signals and US Economic Data Shape Market Dynamics

The upward movement of yields is primarily explained by restrictive signals from the US Federal Reserve. Lodevico M. Ulpo, Jr., Vice President and Head of Fixed-Income Strategies at ATRAM Trust Corp., succinctly describes the situation: “Year-end holidays significantly reduced market liquidity and delayed portfolio diversification and position adjustments."

According to Ulpo, the benchmark yield increased by 5-10 Bps, with particular pressure on the middle part of the curve. This was a direct response to the domestic credit plan for Q1 published by the Bureau of the Treasury, which envisions borrowing of up to 824 billion P—of which 324 billion P through T-bill issuance and up to 500 billion P via T-bonds.

Strong US economic data contributed to this defensive market stance. The US Gross Domestic Product (GDP) grew at an annualized rate of 4.3% in the third quarter, the fastest pace since Q3 2023. This exceeded analyst expectations of 3.3%. The economy was supported by robust consumer spending and a strong export increase, with Q2 showing a growth of 3.8%.

Bear-Steepening and Return to Risk Aversion

Ulpo adds: “Restrictive signals from the Fed reinforced a defensive tone in local interest rates. Combined with illiquid year-end conditions, global yield pressure kept market participants on the sidelines." The positive surprise in US growth led to a bear-steepening trend, as market players postponed expectations for further easing. This caused caution at the long end, where investors reevaluated reflation risks and the sustainability of a looser policy path.

The Federal Reserve lowered its benchmark federal funds rate by another 25 basis points this month to the range of 3.5%-3.75%, but simultaneously signaled that borrowing costs would not fall in the short term as long as clarity on the labor market and inflation remains lacking.

Impact on Philippine Monetary Policy

Restrictive signals could also influence the Bangko Sentral ng Pilipinas (BSP). Reinielle Matt M. Erece, an economist at Oikonomia Advisory and Research, Inc., notes: “While monetary policy remains on an easing path, inflation concerns could push yields higher, as monetary policy may reverse its course."

BSP Governor Eli M. Remolona, Jr. has left the door open for a final rate cut in 2026 to support the economy if needed, provided inflation remains manageable.

Outlook: Consolidation and Growing Uncertainty

For the upcoming week, Ulpo expects sideways consolidation amid continued defensiveness. “With a shortened trading week, we anticipate range-bound consolidation. Investors should monitor liquidity conditions, offshore interest rate movements, and all signals regarding auction demand before normalization in January."

Investors are increasingly focusing on 2026 and factoring in at least two Fed rate cuts, but do not expect the Fed to act before June. Disagreements among Fed decision-makers have created nervousness about the outlook for monetary policy.

Erece concludes: “Next year, we should closely watch inflation movements and employment. Further rate cuts could lead to falling yields, but inflation concerns might prompt investors to expect a tighter policy."