THE GOVERNMENT made a partial award of the seven-year Treasury bonds (T-bonds) it offered on Wednesday as yields continued to rise amid with expectations of further interest rate hikes in the United States.
The Bureau of the Treasury (BTr) only accepted P4.915 billion of its P10-billion program at yesterday’s auction of reissued seven-year papers with a remaining life of six years and 11 months.
The rejection of some bids came even as the offer was oversubscribed — attracting P15 billion in tenders — as the average yield came in at 5.865%, higher than the 5.712% recorded in the previous offer as well as the coupon fetched when the bonds were first issued on April 11.
This was however lower than the 6.3357% quoted for the bonds at the secondary market before the auction.
At the close of trading, the seven-year papers rallied to fetch a 5.8503% yield.
Deputy Treasurer Erwin D. Sta. Ana said yesterday’s auction saw “quite a good turnout” in terms of banks’ bids, even as he noted that the market prefers shorter-dated bonds, such as the three-year and five-year papers.
However, he said the higher returns sought by investors for the bonds auctioned yesterday were in anticipation of possible further policy tightening from both the local and the US central bank.
“They are looking at the inflation picture and then possible further moves from the central bank, and of course you are also contending with possible US rate hikes. So these are the things that the market is factoring in,” Mr. Sta. Ana said.
The BSP last week hiked key rates by 25 basis points amid accelerating inflation and robust economic growth. Rates now stand at 3.75% for the overnight lending rate, 3.25% for the overnight reverse repurchase rate, and 2.75% for the overnight deposit rate.
Meanwhile, the US Federal Reserve raised its benchmark rates by 25 basis points in its March meeting, and sees two more hikes within the year.
Sought for comment, a trader said in a phone interview that yields on the seven-year bonds followed rates of the 10-year US Treasuries that earlier hit their highest level since 2011.
“It increased because the 10-year US bond, it’s above 3.06% already and reached 3.09%. This is because of the strong US dollar and strong US retail sales data last May. So the Philippines followed suit,” the trader said.
The trader added the market is “pricing a rate hike come June for the US.”
The market is also waiting for indications of further tightening in 2019, the trader said. “So we’ll see if the US economy is strong. But it’s not sure yet,” noting that the US consumer price index remains “weak, but is still on the high side.”
RETAIL BONDS
Another trader said apart from the US Treasuries, the increase in rates was due to the BTr’s plan to issue several retail Treasury bonds (RTBs) this year.
“There’s news on the supply but actually, right now the market is being driven by US yields. But they mentioned on the best timing for possible retail bonds,” the second trader said in a separate phone interview.
“If there’s supply, the tendency is that the market will bid higher, that’s why it’s happening. The more supply, the lower the price, the higher the yield,” the trader added.
Mr. Sta Ana said the BTr will indeed issue an RTB this year, which will be a “separate issuance” from another plan to float “Marawi bonds” that will also be offered as RTBs for the rehabilitation of the city.
“There’s always a plan for a retail Treasury bond. It’s a question of when are we going to trigger it. We are looking at the optimal timing. We have done two RTB issuances last year, so we are looking for another transaction this year. So it’s all about timing,” the official said.
“It’s basically market sounding. Also, we are looking at the demand side [on] where is the sweet spot in terms of tenor, so we are doing consultations with our market makers… We are just getting more information but we will make the appropriate announcement soon,” he added.
Mr. Sta. Ana said the government is looking to take advantage of added liquidity in the retail market from Tax Reform for Acceleration and Inclusion law that granted individuals lower tax rates, as well as their mid-year bonuses.
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. — Elijah Joseph C. Tubayan

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