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Gov’t makes partial award of bonds as rates rise

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Treasury
FACADE of the Bureau of the Treasury headquarters. — PHOTO BY MELISSA LUZ T. LOPEZ

By Karl Angelo N. Vidal

THE GOVERNMENT made a partial award of fresh five-year Treasury bonds (T-bonds) it offered yesterday as investors sought higher returns following the February inflation figure.

At its auction on Tuesday, the Bureau of the Treasury raised P12.039 billion out of the planned P20-billion borrowing from the fresh bonds maturing on March 3, 2023.

Total tenders reached P25.884 billion, more than the amount the government wanted to raise.

The five-year bonds fetched a coupon rate of 5.5% with an average rate of 5.452%, 87.5 basis points higher than the 4.53% average rate fetched during the retail Treasury bonds offering in November, wherein the government also offered the same tenor to the market.

Had the government made a full award of the bonds yesterday, the coupon rate would have climbed to 5.75%. At the secondary market yesterday before the auction, the five-year papers were quoted at 5.309%.

It fetched a higher rate of 5.3166% at the close of trading.

National Treasurer Rosalia V. De Leon told reporters after the auction that there would be a steep climb in yields if they fully accepted the tenders.

“If we made a full award, it will be a really steep climb in terms of the five years… But with 5.5%, I think that’s within our own market expectations,” Ms. De Leon said, adding that investors factored in the February inflation data released early yesterday, as well as the market expectations of interest rate hikes coming from the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve.

Inflation accelerated to a three-year high of 4.5% in February, using 2006 as the base year in computing the headline figure. This was faster than the 4% print in January as well as the 4.2% consensus among economists in a BusinessWorld poll and beyond the 2-4% full-year target of the government.

Computed using the new base year of 2012, February inflation stood at 3.9%, up from the 3.4% print in the previous month.

The faster February inflation was attributed to higher prices of food, beverages and tobacco. This came after the government implemented the Tax Reform on Acceleration and Inclusion Act, which imposed hefty excise tax on certain commodities such as sweetened beverages, tobacco and fuel.

BSP Governor Nestor A. Espenilla, Jr. maintained his position that faster inflation is only transitory.

“Our forecast remains that inflation will decelerate back to well within target in 2019 whether based on 2006 or 2012 index,” Mr. Espenilla said.

Inflation’s upward trend boosted market expectations for the BSP to hike interest rates as early as its meeting this month.

In the US, Fed Chair Jerome H. Powell maintained to stick with its plan to gradually hike their interest rates, prompting market players to raise their expectations of Fed rate this year.

“In the [Federal Open Market Committee’s] view, further gradual rate increases in the federal funds rate will best promote attainment of both of our objectives,” Mr. Powell said in a testimony before the US Congress last week.

Meanwhile, Ms. De Leon added that the recent reserve requirements cut done by the BSP, which is expected to release around P90 billion into the financial system, was also factored in by the investors.

Meanwhile, a trader was “surprised” with the result of yesterday’s auction.

“[I was kind of] surprised with the result, but I guess they have no choice,” the trader said in a text message. “[It] must be an admission that CPI (consumer price index) might trend even higher.”

The Treasury plans to auction off P120 billion worth of Treasury bills and another P120 billion worth of Treasury bonds in the January to March period.

The total amount the government intends to borrow from the local market is higher than the P200 billion it offered in the last quarter of 2017.

The government borrows from local and foreign sources to fund its budget deficit, which for this year is capped at 3% of the country’s gross domestic product.

It targets a P888.23 billion gross borrowing plan this year.