Reissued 7-year bonds partially awarded on rate hike concerns

THE GOVERNMENT partially awarded the reissued Treasury bonds (T-bonds) it offered on Tuesday as investors continued to asked for higher yields as the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve said they intend to raise rates anew to tame rising inflation.

The Bureau of the Treasury (BTr) raised just P19.551 billion via the reissued seven-year debt papers it auctioned off on Tuesday, less than the programmed P35 billion, even as the offering attracted P62.69 billion in bids.

The T-bonds, which have a remaining life of six years and 11 months, were awarded at an average rate of 6.74%, higher by 24 basis points (bps) versus the 6.5% coupon fetched for the papers when they were offered for the first time on May 17. At that auction, the average rate for the issuance was logged at 6.428%.

The average yield fetched for the debt papers on Tuesday was also higher than the 6.4935% quoted for the seven-year tenor, the benchmark closest to the remaining life of the bonds, 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.

Had the Treasury fully awarded its offer, the reissued bonds would have fetched an average rate of 6.428%.

National Treasurer Rosalia V. de Leon said in a Viber message to reporters that the BTr made a partial award as investors wanted higher yields due to recent signals from the BSP and Fed that they want to continue hiking benchmark rates in the coming months to help stem high inflation.

She added that the auction committee wanted to align the issue’s yield with prevailing market rates.

Likewise, a trader in a Viber message said the market is expecting a 75-bp hike from the Fed this week after US inflation hit a 40-year high in May.

“Consequently, dealers and investors continued to submit high bids to price in the latest developments,” the trader added. “With the US Fed’s forecasted hikes, the peso will remain under depreciation pressure and that will exacerbate inflation fears, and it’s not a bond-friendly catalyst.”

The US consumer price index increased by a faster-than-expected 8.6% last month, the largest year-on-year increase since December 1981, according to US Labor department data released on Friday, showing inflation has yet to peak.

This caused renewed bets of aggressive action from the Fed at its June 14-15 meeting that could dampen growth prospects for the world’s largest economy.

The US central bank kicked off its tightening cycle with a 25-bp increase in March followed by a 50-bp hike last month as inflation continued to reach multi-year highs.

Meanwhile, at home, Monetary Board member and incoming BSP chief Felipe M. Medalla said in a Bloomberg interview last week that they are “almost” sure to hike at their June 23 meeting and there is also a “90% chance” of another increase at their subsequent review on Aug. 18.

Increases worth 25 bps in the Monetary Board’s June and August meetings would bring the benchmark rate to 2.75% from 2.25% currently. The BSP began unwinding its pandemic-driven easy policy with a 25-bp hike at its May 19 review.

Headline inflation in May surged by 5.4% year on year from 4.9% in April and 4.1% a year ago. This is the fastest print since the 6.1% seen in November 2018.

Year to date, inflation has averaged 4.1%. This is lower than the central bank’s 4.6% forecast but above its 2-4% target for the year.

The peso on Monday closed at P53.50 against the dollar, its weakest finish in over three years, as high US inflation in May caused fears of a more aggressive move from the Fed.

The BTr wants to raise P250 billion from the domestic market this month, or P75 billion via Treasury bills and P175 billion from T-bonds.

The government borrows from local and external sources to help fund a budget deficit seen to hit 7.7% of gross domestic product this year. — T.J. Tomas