Gov’t securities may fetch higher rates after policy hikes

RATES of government securities (GS) on offer this week could rise amid continued monetary policy hikes from central banks in the past week and a weakened peso.

The Bureau of the Treasury (BTr) will offer P15 billion in Treasury bills (T-bills) on Monday, made up of P5 billion each in 91-, 182-, and 364-day debt papers.

On Tuesday, the BTr will auction off reissued 20-year Treasury bonds (T-bonds) with a remaining life of 16 years and four months.

Traders expect T-bill and T-bond yields to move higher at this week’s auction as central banks hiked their respective rates in the past week to combat elevated inflation.

“There was a slew of rate hikes from various central banks this week and it seems like there will be more to come; that’s why sentiment for bonds remains bearish,” a trader said.

The trader expects T-bill rates to rise by 15-20 basis points (bps) from last week’s awarded yields and sees the 20-year paper to be quoted at 7.25% to 7.50%.

A second trader said that T-bill rates should be higher by 25-50 bps on the back of the Bangko Sentral ng Pilipinas’ (BSP) latest policy move, while T-bonds might range between 7.25% and 7.50% “to test if the Bureau of the Treasury will award at those levels.”

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that rates could still be higher in view of a depreciated peso.

“New record [low] for the peso exchange rate could lead to higher import prices and overall inflation, as well as increasing the odds of [a] further local policy rate hike,” said Mr. Ricafort. “A surprise [or] off-cycle local policy rate hike to help stabilize the peso cannot be ruled out.”

The Federal Reserve hiked its policy rates by another 75 bps last week while signaling larger increases to come as inflation is still way above its 2% target at 8.3% as of August. The central bank has raised key rates by 300 bps since March, including two other 75-bp moves in June and July.

At home, the BSP increased its benchmark interest rates by 50 bps to 4.25% on Thursday, as predicted by 11 of 15 analysts in a BusinessWorld poll last week. It has hiked borrowing costs by 225 bps since May to rein in rising prices.

The consumer price index climbed to 6.3% year on year in August from the nearly four-year high of 6.4% a month earlier and 4.4% a year ago. It was the fifth straight month that inflation exceeded the BSP’s 2-4% target this year.

BSP Governor Felipe M. Medalla said last month that the Fed’s aggressive tightening also poses an additional risk to domestic prices due to its effect on the peso.

The peso closed at an all-time low of P58.50 per dollar on Friday, losing one centavo from its P58.49 finish on Thursday, Bankers Association of the Philippines data showed.

The peso has weakened by 14.71% or P7.5 this year from its P51-a-dollar close last year.

“The intention is not to target a particular level for the exchange rate,” BSP Deputy Governor Francisco G. Dakila, Jr. told a news briefing after the rate hike decision. “That is not the policy objective. In deciding on the appropriate stance of monetary policy, the priority is to bring inflation back to within the target band over the medium term.”

At the secondary market on Friday, the 91-, 182-, and 364-day T-bills were quoted at 2.7762%, 3.7042%, and 3.9280%, respectively, based on the PHP Bloomberg Valuation Reference Rates published on the Philippine Dealing System’s website.

Meanwhile, the 20-year bond was quoted at 7.2329%.

Last week, the Treasury partially awarded its T-bill offer, only accepting bids for the six-month debt, even as total demand reached P16.288 billion, above its P15-billion offer.

The Treasury borrowed just P3.162 billion via the 182-day securities, even as bids reached P7.123 billion. The average rate of the tenor went up by 17.6 basis points (bps) to 3.810% and accepted rates ranged from 3.700% to 3.900%.

Meanwhile, the government rejected all bids for 91-day T-bills on Monday, even as tenders for the tenor hit P5.965 billion, above the P5-billion program. Had it been awarded, the average rate of the three-month paper would have gone up by 159.4 bps to 3.912% from the 2.318% fetched in its last successful awarding on Sept. 5.

The BTr also refused to award 364-day debt papers, with demand only reaching P3.2 billion versus the P5 billion on the auction block. Had the government accepted all bids, the debt paper’s average rate would have climbed by 110.8 bps to 4.890% from 3.782% fetched for the tenor on Aug. 22, which was the last successful award.

Meanwhile, the reissued 20-year bonds to be offered on Tuesday were last auctioned off on Nov. 26, 2019, where the BTr partially awarded the papers at P12.271 billion against a P20-billion offering.

The papers were awarded an average rate of 5.341% at that auction, lower by 140.9 bps versus the 6.75% coupon fetched for the bonds when they were offered for the first time on Jan. 22, 2019.

The BTr wants to raise P200 billion from the domestic market this month, or P60 billion through T-bills and P140 billion via T-bonds.

The government borrows from local and external sources to help fund a budget deficit capped at 7.6% of gross domestic product this year. — Diego Gabriel C. Robles