Rates of T-bills, bonds to climb

RATES of government securities (GS) on offer this week are expected to rise as the Philippine central bank is seen to be aggressive in its next policy meeting as inflation remains elevated.

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 P35 billion in reissued 10-year Treasury bonds (T-bonds) with a remaining life of six years and five months.

Traders expect yields to move higher at this week’s T-bill and T-bond auctions.

The first trader sees T-bill rates moving sideways or higher by 10 basis points (bps) and the reissued 10-year bonds fetching yields ranging from 6.25% to 5.75%.

The first trader said faster July inflation could give the Bangko Sentral ng Pilipinas (BSP) a reason to hike rates by 50 bps instead of just 25 bps.

The second trader sees T-bill rates rising by 10-15 bps from those seen at the previous auction and T-bond yields to range at 5.75% to 5.90%.

“With the release of inflation data, which printed faster than expected, the BSP is expected to continue to be aggressive in its tightening ways, therefore putting pressure on short end of the GS curve,” the second trader said.

The third trader expects the reissued 10-year papers to be priced at around 5.60% to 5.875%, in line with secondary market levels.

“As with the previous weeks’ auctions, we should see continued demand and we expect tenders to be over 2x the offer. Even with CPI (consumer price index) at 6.4%, I think market is comfortable with current levels given that the BSP has sounded off that they are prepared to take all needed actions vs. CPI.  This, together with their statement of a sure 25-bp or 50-bp hike [next week], will keep levels at bay,” the third trader said.

Meanwhile, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that yields of government securities on offer this week could ease to track the slight week-on-week declines in rates short-term tenors and larger declines of 20-30 bps in long-term ones at the secondary market.

Headline inflation quickened to 6.4% year on year in July, its fastest pace since October 2018, mainly due to soaring prices of food and higher transport costs.

The reading was faster than the 6.1% in June and 3.7% a year ago. It also settled at the high end of the BSP’s 5.6-6.4% forecast range for the month.

For the first seven months, inflation averaged 4.7%, lower than the 4% seen in the same period a year ago and the central bank’s 5% inflation forecast, but higher than its 2-4% target for the year.

BSP Governor Felipe M. Medalla last week said the central bank still has room to hike borrowing costs without sacrificing the economy’s recovery as real interest rates remain negative.

He said their planned hike of 25 bps or 50 bps at their Aug. 18 meeting is still supportive of growth. Mr. Medalla added that it is too early to tell if the August increase will be the last for now amid lingering uncertainties at home and abroad.

The Monetary Board last month raised the benchmark interest rates by 75 bps in an off-cycle move, as it sought to contain inflationary pressures exacerbated by the peso’s weakening versus the dollar amid the Fed’s aggressive stance. It has raised rates by 125 bps so far since May.

At the secondary market on Friday, the 91-, 182-, and 364-day T-bills were quoted at 2.123%, 2.871%, and 3.3693%, respectively, based on the PHP Bloomberg Valuation Reference Rates published on the Philippine Dealing System’s website.

Meanwhile, the 10-year bond fetched a yield of 6.1379%. The seven-year tenor, the closest tenor to the remaining life of the papers to be offered on Tuesday, was quoted at 5.8179%.

Last week, the Treasury raised P15 billion as planned from its auction of T-bills, with bids reaching P43.31 billion.

Broken down, the BTr made a full P5-billion award of 91-day securities as the tenor attracted P24.07 billion in bids. The average rate of the tenor went down by 18.3 bps to 2.09%. Accepted rates ranged from 2.08% to 2.1%.

The government also borrowed P5 billion as planned via the 182-day securities as tenders reached P12.94 billion. The average rate of the tenor rose by 4.6 bps to 3.188%. Accepted rates ranged from 3.125% to 3.225%.

Lastly, the Treasury raised P5 billion from the 364-day debt papers as programmed, with demand for the tenor reaching P6.29 billion. The tenor’s average rate rose by 12.4 bps to 3.48%, with the government accepting offers ranging from 3.35% to 3.7%.

Meanwhile, the reissued 10-year papers to be offered on Tuesday were last auctioned off on Feb. 18, 2020, where the BTr made a full award of the reissued papers worth P30 billion at an average rate of 4.409%.

The BTr wants to raise P215 billion from the domestic market this month, or P75 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