TREASURY BONDS (T-bonds) on offer tomorrow are seen to fetch higher yields as investors seek higher returns ahead of the policy meetings of the local and US central banks.

The Bureau of the Treasury (BTr) plans to raise as much as P20 billion at Tuesday’s auction of fresh 10-year T-bonds set to mature on March 22, 2028.

A bond trader told BusinessWorld in a phone interview that lenders will likely ask for higher yields at tomorrow’s auction, although demand will be low.

“[I’m] expecting it to be awarded at 6.25%. Not much demand though, especially ahead of the FOMC (Federal Open Market Committee) meeting,” the trader said.

At its last auction of the same tenor, the Treasury rejected all bids for the fresh bonds as banks asked for rates higher than what the government was willing to pay. Had the government accepted all bids at that auction, it would have paid 5.461%.

At the secondary market on Friday, the 10-year bonds were quoted at 6.1865%.

The trader however noted that the supposed rate hike by the US central bank has been priced in already.

The US Federal Reserve is expected to hike its interest rates when it ends a two-day policy review on Wednesday.

However, markets around the world are on the lookout for signals on whether the Fed will uphold its previous forecast of three rate hikes this year or raise it to four.

Guian Angelo S. Dumalagan, market economist of Land Bank of the Philippines, said the Fed will likely tweak its rates and affirm its prior projection of about three rate hikes this year.

Meanwhile, another trader said tomorrow’s auction is seen to receive tepid demand as banks are expected to ask for higher yields.

“I think the bid coverage will be much lower. [Probably] below the P20 billion offer amount,” the trader said.

“Tendered bids would be there, but definitely the bids would be higher.”

The trader noted that given the long tenor of the bonds on offer, investors will likely park their funds in the short-end and more attractive instruments, such as the term deposit facility (TDF) of the Bangko Sentral ng Pilipinas.

“Right now, given the 3% yields for a 28-day TDF, it’s not that bad,” she added.

Last week, banks swarmed the facility, with demand reaching P145.828 billion across three tenors.

Nearly half of the tenders went to the seven-day term deposits which reached P70.838 billion, with a 3.1893% average interest rate.

Meanwhile, yields for the 14- and 28-day term deposits rose to 3.2404% and 3.3274%, respectively.

“If BTr will issue a 10-year bond with an interest rate, say, 5.85%. would that be attractive? Investors can bid for it provided that they will award at a higher yield,” the trader noted, adding that the Treasury might be forced to accept high-yielding bids.

“They need to borrow a lot given that they need to cover with the projects in the pipeline. They will be forced to get it at a higher yield.”

The Philippines borrows from both domestic and external sources to help fund its budget deficit and support a growing economy, particularly to support the ambitious P8.44-trillion infrastructure spending plan.

The Treasury wants 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.

The government targets a P888.23 billion gross borrowing plan this year. — Karl Angelo N. Vidal

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