TREASURY BONDS (T-bonds) on offer tomorrow are likely to fetch higher yields on the back of higher US Treasury yields and heightened inflation expectations.

The Bureau of the Treasury plans to raise as much as P20 billion during Tuesday’s auction of fresh seven-year T-bonds set to mature on Feb. 8, 2025.

“I would expect [Tuesday’s auction] to be higher. I would expect the market to bid up the rate close to the 5% level,” a trader said in a phone interview.

Another trader projected the yields to land within the 4.875-5.125% range “to reflect recent upward trend in US treasury yields and higher inflation expectations.”

On Friday, the 10-year US Treasury climbed to a four-year high of 4.85% on the back of higher payrolls and rising wages.

Last month, the US created additional 200,000 jobs, higher than the market consensus around an increase of 180,000 jobs and the 148,000 jobs booked in December. 

The growth in average hourly earnings sped up to 2.9% in the 12 months ending last month, with a month-on-month growth of 0.3% in January, data released by the US Labor Department on Friday showed.

The upbeat economic data prompted investors to expect accelerating US inflation.

On the demand side, the traders said Tuesday’s auction is unlikely to be oversubscribed, with a trader saying: “If ever bids will exceed the offer only because they (market players) commanded higher yields.”

“The market will demand of the seven-year papers depending on the rate. But in my opinion, if it’s not [within the 5% level], walang makikitang demand (demand will be absent),” the second trader said.

Should the Treasury accept bids at 5%, the trader projected rates in the secondary market to climb “conservatively by 20 basis points” from its current levels.

“But if they decide to reject [some bids], I expect the market to be quiet or everybody will stay on the sidelines just to watch,” the trader said, adding that the Treasury can reject unreasonable bids on the back of its healthy cash position.

The trader cited the issuance of retail Treasury bonds in December which raised P255.4 billion as well as the dollar-denominated global bonds where it raised $750 million of fresh funds while swapping $1.25 billion worth of old bonds.

At the secondary market on Friday, the seven-year bonds were quoted at 5.7146%.

During its last offer of seven-year bonds in October, the government fully awarded the reissued papers, as banks ditched the central bank’s term deposit facility for government securities and as yields inched down a notch.

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. This is higher than the P200 billion the BTr 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.

The government has set a P888.23-billion gross borrowing plan for this year, 22.05% higher than last year. — Karl Angelo N. Vidal