THE government fully awarded the reissued Treasury bonds (T-bonds) it offered on Tuesday as investors asked for higher rates after the central bank hiked borrowing costs and amid expectations of further monetary tightening here and in the United States.
The Bureau of the Treasury (BTr) raised P35 billion as planned from the reissued 10-year bonds it auctioned off on Tuesday, with tenders reaching P72.853 billion, more than double the offer.
The debt papers, which have a remaining life of nine years and seven months, were awarded at an average rate of 6.894%, 58.1 basis points (bps) higher than the 6.313% quoted when the series was last offered on April 26. The bonds carry a coupon rate of 4.875%.
The average rate was also higher than the 6.4068% fetched for the 10-year tenor at the secondary market prior to the auction, based on the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.
National Treasurer Rosalia V. de Leon said in a Viber message to reporters that the government made a full award of its offer on Tuesday even as the market demanded higher yields for the long-dated bonds following the BSP’s rate hike last week “and expectations of similar follow up actions both from Fed (US Federal Reserve) and BSP (Bangko Sentral ng Pilipinas) to tame inflation.”
The first trader said via Viber that the auction result was expected as rates bid by banks for the issue fell within the market’s expected range of 6.625% and 7%.
“Despite a strong auction turnout, market players continued to submit high and defensive bids on inflation concerns and more monetary policy tightening to come globally.”
The second trader said in a Viber message that the yield range seen on Tuesday came as expected by market players amid “heightened inflation expectations.”
“The bids are quite defensive, similar to what we have seen in the recent auctions,” the second trader added.
Last week, the BSP raised benchmark interest rates for the first time since 2018 to tame rising inflation.
The Monetary Board on Thursday increased the key policy rate by 25 bps to 2.25%. Accordingly, interest rates on the BSP’s overnight deposit and lending facilities were also hiked by 25 bps to 1.75% and 2.75%, respectively.
At the meeting, the central bank upwardly revised its average inflation forecast for 2022 to 4.6% from the previous forecast of 4.3%, exceeding the 2-4% target band. For 2023, the BSP’s inflation forecast was hiked to 3.9% from 3.6% previously.
Inflation climbed to 4.9% in April, the highest in more than three years, as oil and commodity prices soared amid the Russia-Ukraine war and supply chain disruptions.
The start of the BSP’s tightening cycle came a week after the release of data showing gross domestic product (GDP) expanded by a better-than-expected 8.3% in the first quarter.
Meanwhile, US central bankers broadly back two more big interest rate hikes in June and July, but what happens after is a matter of intense internal debate that turns in large part on differing views of how price pressures will play out in months ahead, Reuters reported.
To Atlanta Fed President Raphael Bostic, once the Federal Reserve has delivered half-of-a-percentage-point rate hikes as Chair Jerome H. Powell has signaled, “a pause in September might make sense.”
“I think a lot of it will depend on the ground dynamics that we are starting to see” both of the inflation the Fed is trying to contain and the impact of higher interest rates on the economy, he told the Rotary Club of Atlanta on Monday.
Speaking later in the day at a separate event, Kansas City Fed President Esther George painted a murkier picture, enumerating the many factors like Russia’s war in Ukraine and China’s COVID-19 lockdowns that could play out to either intensify or relieve inflation pressures.
The Fed started its tightening cycle with a 25-bp hike in March. It then raised borrowing costs by 50 bps in its meeting on May 3-4.
The government wanted to borrow P200 billion from the domestic market in May, or P60 billion via Treasury bills (T-bill) and P140 billion from T-bonds.
Tuesday’s T-bond auction was the last one for the month. The BTr raised just P115.208 billion through the longer-tenored debt against the P140-billion program.
With T-bill awards for the month reaching only P26.1 billion, the BTr’s total borrowings from the domestic market in May reached just P141.31 billion versus its P200-billion plan.
The Treasury is expected to release its June borrowing plan within the week.
The government borrows from local and external sources to help plug a budget deficit capped at 7.7% of GDP this year. — Tobias Jared Tomas with Reuters