Gov’t rejects bids for 20-year bonds as rates rise

Posted on July 26, 2017

THE GOVERNMENT rejected all bids for the reissued 20-year Treasury bonds (T-bond) it auctioned off yesterday due to weak investor demand amid offshore uncertainties and as the papers fetched higher rates.

The Bureau of the Treasury (BTr) planned to raise as much as P15 billion from yesterday’s offering of the reissued long-tenored notes with a remaining life of 19 years and 10 months.

The T-bonds on the auction block were first issued last May 18 with a coupon rate of 5.25%.

Bids for the securities came below the Treasury’s offer, with tenders coming in at just P11.202 billion versus the P15-billion program.

Had the government accepted yesterday’s bids and fully awarded its offer, it would have been forced to accept an average rate of 5.244%, 20.9 basis points (bp) higher than the 5.035% rate seen during the June 27 auction of reissued 20-year T-bonds, where the Bureau of the Treasury raised P15 billion as planned from the securities with a remaining life of 19 years and 11 months after bids by banks went down.

Before yesterday’s auction, the 20-year bond was quoted at 5.1625% in the secondary market. This went up slightly to 5.1645% as trading closed.

National Treasurer Rosalia V. De Leon said yesterday that there were no demand for longer tenors as markets are on a wait-and-see stance ahead of the US Federal Reserve’s policy meeting set to start later that day.

“The rates are unreasonably high so it’s really disappointing. When we did the market survey, we were looking at a 5-10-basis-point increase. They have indicated that it would be oversubscribed by five or two times. Apparently, there’s no demand for the 20 years right now in spite of the very low inflation expectations, and there’s also ample liquidity. So maybe the appetite is not on the long end,” Ms. De Leon told reporters after yesterday’s auction.

“Maybe it’s really wait and see for investors right now, particularly on the US. They’re going to have the Fed meeting today, on the 25th and the 26th. So maybe...they’re waiting on the sidelines to see what will be the Fed’s decision,” she added.

Ms. De Leon said despite the rejection, the government’s current cash position is still sustainable.

“We have a very strong cash buffer, so we can afford to [reject]... There’s also a very good disbursement performance, so I think were still good for the rest of the year. We’ve build a very strong cash balance,” she said.

Bond traders interviewed yesterday said the market was asking for higher rates due to lingering uncertainties from the Fed and the European Central Bank (ECB), but maintained that government still had enough liquidity for its fiscal program.

“It is due to the sustained uncertainties in the Fed and the ECB. Most of the players wanted higher rates for the longer tenor,” a trader said in a phone interview yesterday.

“Players on the other hand are...cautious ahead of the FOMC (Federal Open Market Committee) that starts tonight,” the trader added.

The US central bank is expected to stand pat on policy settings at this week’s meeting after raising borrowing costs anew in June, but could give hints on its future interest rate hike plans, which it had said could happen this year.

The ECB also appears likely to decide later this year on when to scale back its monthly bond purchases.

“The rejection was a reflection that the BTr is not comfortable accepting higher rates, because looking at the rates at the auction, it’s kind of a big jump. So they’re still very comfortable with their position,” another trader said separately.

“We’re also looking at the higher borrowing plan for 2018, which is a concern for long-dated bonds as well. If there’s an increase in the borrowings in the local market, the tendency is the lenders is to demand higher rates from the borrower,” the trader said.

The government plans to borrow P889.7 billion in 2018, 22.3% more than its revised P727.64-billion program this year.

Of this total, P711.776 billion will be sourced from local creditors, in line with the government’s 80-20 financing mix, while about P177.944 billion will be borrowed from external lenders.

“I think that’s in line with the current concerns regarding the government’s fiscal policy. It seems that the government continues to look at its socioeconomic program, the funding of which will be coming mainly from local debt,” the trader said.

Meanwhile, Ms. De Leon said the government is still on track for its planned $200-million panda bond offer this semester.

“There’s liquidity in Chinese onshore renminbi market right now. But we’re just waiting because we have to get approvals also. We’re discussing it now with the BSP (Bangko Sentral ng Pilipinas),” she said.

Asked whether they are on track with the offer, Ms. De Leon replied in the affirmative, adding: “Besides, we’re still in a good cash position for now.” -- Elijah Joseph C. Tubayan