Treasury bills, bonds may fetch higher rates on faster inflation

RATES of government securities to be auctioned off this week are expected to climb due to high April inflation and the increase in the government’s debt ratio in the first quarter and ahead of the central bank’s policy review.

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

On Tuesday, it will auction off P35 billion in fresh seven-year Treasury bonds (T-bonds).

The first trader said that T-bill yields may go up by 15 to 20 basis points (bps), while the average yield of the fresh seven-year paper could range between 6.25% and 6.625%.

“[The] market is still concerned about inflation in the months ahead, while adding fuel to the fire is the country’s debt which is at 63.5% of GDP (gross domestic product) as of March,” the first trader said in a Viber message.

“The incoming administration should be able to address inflation and to bring down the debt-to-GDP ratio to avoid a credit rating downgrade from international debt watchers,” the trader added.

The first trader said the market remains cautious over further rate hikes from the US Federal Reserve, tightening by the Bangko Sentral ng Pilipinas (BSP) as early as its May 19 meeting, and as players “wait for more clarity as to the direction of the country’s fundamentals in the next few months.”

A second trader said debt yields may climb “as market remains defensive and some starting to believe that BSP can afford to start hiking rates on Thursday’s MB (Monetary Board) meeting” due to faster-than-expected GDP growth in the first quarter, which could cause inflation to spike further.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said yields of T-bills on auction this week could go up and track secondary market rates.

“The latest increase in the [secondary market] yields largely due to stronger GDP data could support/justify possible hike in local policy rate,” Mr. Ricafort added.

Inflation surged to a 40-month high of 4.9% year on year in April due to rising food and utility prices.

It was faster than 4% the previous month and breached the central bank’s 2-4% target. It also settled near the upper limit of the 4.2-5% forecast range in April.

Meanwhile, economic growth in the first quarter accelerated by a higher-than-expected 8.3% annually on strong household spending as lockdowns were eased, the Philippine Statistics Authority reported last week.

It was a reversal from the 3.8% decline in the same period last year and faster than the 7.8% growth logged in the final three months of 2021.

The latest GDP print beat the 6.7% median estimate in a BusinessWorld poll and is within the 7-9% target growth band of the government.

It also marked the fourth consecutive quarter that the GDP stayed in the positive territory. The first quarter’s GDP growth was the highest since the 12.1% recorded in the second quarter last year.

In line with the economy’s growth, the National Government’s end-March debt of P12.68 trillion was equivalent to 63.5% of GDP, exceeding the 60% threshold considered manageable by multilateral lenders for developing economies.

The 63.5% level compares with 60.5% at the end of 2021 and the 65.7% posted at the end of 2005.

On the other hand, a BusinessWorld poll held last week showed 9 out of 17 analysts expect the central bank to keep its key rates at record lows, while eight see a possibility of a 25-bp rate hike at the BSP’s meeting on Thursday.

A slim majority of analysts said the BSP may choose to hold fire as it waits for more evidence that economic recovery is already entrenched, while some are pricing in a rate increase due to stronger-than-expected first-quarter growth that could further stoke inflation.

The central bank has not touched borrowing costs since slashing rates by a total of 200 bps in 2020.

At the secondary market on Friday, the 91- 182- and 364-day T-bills were quoted at 1.3744%, 1.6772%, and 1.9619%, respectively, based on the PHP BVAL Reference Rates published on the Philippine Dealing System’s website.

Meanwhile, the seven-year bond fetched a yield of 6.1384%.

The government partially awarded the T-bills it offered last week as yields continued to rise due to higher-than-expected inflation, which fueled expectations of an earlier rate hike from the BSP.

The BTr only awarded P5 billion in T-bills at its auction on Tuesday even as total tenders reached P19.984 billion, slightly over the P15-billion program.

Broken down, the government raised P5 billion as planned via the 91-day securities as bids reached P9.009 billion. The average rate of the tenor climbed by 25.9 bps to 1.531% from 1.272% at the last auction.

The BTr rejected all offers for 182-day T-bills even as tenders reached P6.4 billion versus the P5-billion program. Had the government made a full award, the average rate of the six-month paper would have soared by 53 bps to 2.165% from the 1.635% fetched at the previous auction.

The government also did not award any 364-day debt despite demand for the tenor reaching P8.602 billion against the P5-billion offer. If the BTr had made a full award, the average rate of the one-year T-bill would have climbed by 39.6 bps to 2.329% from the 1.933% quoted previously.

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

The government borrows from local and external sources to plug a budget deficit capped at 7.7% of GDP this year. — T.J. Tomas