Seven-year T-bonds to fetch higher rates

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YIELDS on reissued Treasury bonds (T-bonds) on offer today will likely pick up ahead of the policy meeting of the US Federal Reserve.

The Bureau of the Treasury is offering P10 billion in reissued seven-year T-bonds with a remaining life of six years and 10 months.

“For the T-bonds, we expect the rates to pick up by around 10 basis points from the previous auction,” a trader said in a phone interview.

The government only borrowed P4.915 billion of its P10-billion program during the last seven-year bond auction on May 15.

The bonds fetched an average rate of 5.865%, higher than the 5.712% logged in the previous offer. The bonds carry a coupon of 5.75%.

At the secondary market on Monday, the seven-year papers were quoted at 5.8%.

Another bond trader projected the yields to land within the 5.75%-6% range.

“The bond auction will coincide with start of FOMC (Federal Open Market Committee) meeting so expect investors to be more cautious,” the second trader said.

Markets are expecting the US Federal Reserve to raise its benchmark rates by a quarter of a percentage point at its meeting this week after tweaking its key rates in March. Currently, the federal funds rate stands at a 1.5%-1.75% range.

The US central bank’s meeting also comes at a time of escalated trade tensions after US President Donald J. Trump pulled out of a joint statement at the Group of 7 summit in Canada over the weekend.

Washington has also slapped steel and aluminum tariffs on its allies Canada, Mexico and the European Union.

However, Fed Chairman Jerome H. Powell said in April that a potential trade war would not immediately affect its plans to gradually raise rates.

Meanwhile, the second trader noted that the Treasury has enough leeway to reject high bids. “[They] could issue if yields are at 5.75%-5.8%.”

The Treasury is holding two auctions per week this quarter — one for Treasury bills and another for T-bonds — to reflect increased borrowing requirements.

The government plans to borrow P888.23 billion this year from local and foreign sources to fund its budget deficit, which is capped at 3% of the country’s gross domestic product. — KANV