YIELDS on government securities (GS) were mixed last week as renewed tensions in the Middle East stoked market volatility, while softer-than-expected US inflation data caused traders to reprice their US Federal Reserve policy bets.

Yields, which move opposite to prices, climbed by an average of 7.4 basis points (bps) week on week at the secondary market, based on the PHP Bloomberg Valuation Service Reference Rates as of July 17 published on the Philippine Dealing System's website.

Ravelas said. "But if geopolitical tensions ease and inflation data remain benign, yields could stabilize.

At the short end, rates closed mixed as the 91- and 364-day Treasury bills (T-bills) inched up by 0.24 bp and 2.93 bps to fetch 5.061% and 5.9811%, respectively, while the 182-day debt declined by 4.52 bps to 5.5324%.

Meanwhile, tenors at the belly climbed across the board. Rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) rose by 13.05 bps (to 6.5547%), 16.03 bps (6.8199%), 17.75 bps (7.014%), 18.17 bps (7.146%), and 15.95 bps (7.3008%), respectively.

At the long end, the 10-year T-bond ticked up by 1.92 bps to yield 7.2826%, while the 20- and 25-year T-bonds slipped by 0.08 bp and 0.03 bp to fetch 7.0325% and 7.0323%, respectively.

GS volume traded reached P23.49 billion on Friday, higher than P22.65 billion in the previous week.

"Headlines of retaliatory strikes between US and Iran fueled risk-off sentiment in the global markets, which drove the sell-off in the local fixed-income market," Security Bank Corp. Head of Fixed Income Reginald Carl R. Reyes said in a Viber message.

The US said it had completed an eighth straight night of attacks against Iran after earlier announcing that two US military personnel were killed in Jordan and another was missing following an Iranian attack, Reuters reported.

The US and Iran have intensified attacks since an interim ceasefire deal signed a month ago fell apart, raising the possibility of a return to all-out war.

Last week's yield curve reflected a "tug-of-war" between the Middle Eastern conflict and data showing easing US inflation, Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said in a Viber message.

"Softer-than-expected US inflation data reinforced expectations of future Fed rate cuts, which helped anchor long-term yields," he said. "However, escalating tensions between the US and Iran, along with disruptions in the Strait of Hormuz, pushed oil prices higher and revived inflation concerns, keeping upward pressure on yields globally."

Pricing in Fed funds futures indicates expectations the US central bank will raise interest rates in the coming months to bring down inflation that is above the Fed's 2% annual target.

Meanwhile, Mr. Reyes added that the Bureau of the Treasury's (BTr) full rejection of bids for T-bonds at Tuesday's auction gave the market "temporary reprieve."

"[It] would have exacerbated the upward trajectory of local yields seen [last] week."

The BTr rejected all bids for the reissued 10-year T-bonds it offered last week amid weak demand and high yields. Had the government accepted all the submitted tenders, the issue would have fetched an average rate of 7.575%.

"(T)he rejection of Treasury bond bids by the Bureau of the Treasury highlighted the market's demand for higher risk premiums amid renewed geopolitical uncertainty and persistent inflation concerns," Mr. Ravelas added.

"At the same time, expectations of a cautious BSP (Bangko Sentral ng Pilipinas) and the possibility of inflationary pressures from weather-related supply shocks kept investors defensive, particularly on the medium to long end of the curve."

For this week, both analysts said the market will continue to monitor developments in the Middle East.

"If Middle East tensions remain elevated and energy prices continue to climb, yields could move higher as markets price in inflation risks," Mr. Ravelas said. "But if geopolitical tensions ease and inflation data remain benign, yields could stabilize. For now, investors should expect a period of elevated volatility, with the yield curve likely to remain relatively flat and biased toward slightly higher yields."

"We expect local yields to continue to be driven by developments on the US-Iran conflict, with upward bias given weaker demand amid cautiousness of market players," Mr. Reyes added. — Matthew Miguel L. Castillo with Reuters.