THE GOVERNMENT made a full award of the reissued three-year Treasury bonds (T-bond) it offered yesterday on the back of strong demand following the speech of US Federal Reserve Chief Jerome Powell over the weekend and bets of monetary easing by the local central bank as early as next month.

The Bureau of the Treasury fully awarded P20 billion worth of the reissued bonds, with total tenders amounting to P56.6 billion or nearly three times the offer volume.

The bonds, which were first issued last July 4, carry a coupon rate of 4.75% and have a remaining life of two years and 10 months.

The three-year debt notes fetched an average rate of 3.961% yesterday, 84.2 basis points (bps) lower than the 4.803% quoted when the bonds were first offered on July 2.

At the secondary market on Tuesday, the three-year bonds fetched a rate of 3.99%, based on the Bloomberg Valuation Service Reference Rates.

Following the auction, National Treasurer Rosalia V. De Leon said the Treasury expected the debt papers to fetch lower rates due to external factors such as the US Federal Reserve’s Jackson Hole retreat over the weekend and fears of a global economic slowdown.

“It’s expected coming after what we’ve heard from Powell…during the Jackson Hole speech. We also see that the Fed will be acting appropriately given the slowdown in the global economy, and also on the onshore,” Ms. De Leon told the reporters.

The US economy is in a “favorable place” and the Federal Reserve will “act as appropriate” to keep the current economic expansion on track, Mr. Powell said on Friday in remarks that gave few clues about whether the central bank will cut interest rates at its next meeting or not.

The Fed cut rates for the first time in more than a decade last month, backing Mr. Powell’s verbal commitment to sustain the expansion with action. Mr. Powell on Friday made clear that commitment is still in place in a speech he gave at an annual Fed retreat at a Jackson Hole valley resort set against the Grand Teton mountains.

He said there are “significant” risks to the economy, including the trade dispute, the chaotic British exit from the European Union, tension in Hong Kong and signs of a global economic slowdown.

But he also said the domestic US economy is in a “favorable place” now and he stressed limits to the Fed’s ability to respond to the trade issues. He also said officials need to “look through” short-term turbulence, and stopped short of endorsing or signaling the pace and depth of rate cuts markets widely expect and that US President Donald Trump has demanded.

There are “no recent precedents to guide any policy response to the current situation,” Mr. Powell said, adding that monetary policy “cannot provide a settled rulebook for international trade.”

Locally, Ms. De Leon said the lower rates may also be attributed to bets of possible easing by the Bangko Sentral ng Pilipinas (BSP) as early as its Monetary Board’s (MB) rate-setting meeting next month and to increased liquidity in the market.

“There’s also the expectation of more easing coming from the BSP, including a possible rate cut when they meet again during the MB discussions in September. So this is something that’s expected,” she said.

Ms. De Leon said the maturity of some P18-billion worth of government securities this week contributed to market liquidity.

A bond trader shared the same sentiment, adding that the decline in yields yesterday was within market’s expectations amid strong demand for short-term debt papers.

“The auction result is actually within market expectations. Lots of tenders because there’s a strong demand on the short end of the curve. Market continues to price in another 25 bps rate cut in September due to inflation within BSP’s forecasts. Then of course there’s the possibility of a reserve requirement cut by BSP,” a bond trader said in a phone message.

BSP Governor Benjamin E. Diokno has hinted on another cut in key policy rates and a 25-basis-point reduction in big banks’ reserve requirement ratio (RRR) as early as September.

The central bank’s Monetary Board at its previous meeting slashed policy rates by 25 bps. Current interest rates now range from 3.75% to 4.75%.

The RRRs now stand at 16% for big banks and 6% for thrift banks following the last round of the 200-bp multi-phased reduction in all RRRs last July 26.

PRIZE BOND
Meanwhile, Ms. De Leon said they are currently studying the possibility of issuing a “prize bond,” like the lottery bonds issued in Pakistan and other countries. Through this scheme, bonds are randomly selected within an issue and are redeemed at a higher value than the face value of the debt paper.

“We’ve already discussed this before… [We’re] looking at some possible structures like what others have also been doing…,” she said.

“So on top of the usual coupon that you get, there’s also an opportunity for you to win… But that’s something that we still need to explore further [and] evaluate in terms of the [funding] requirements like infrastructure, and also even in terms of the legal issues that may come up,” Ms. De Leon said.

The government is set to borrow P230 billion from the domestic market this quarter through T-bills and Treasury bonds.

It is looking to raise P1.189 trillion this year from local and foreign sources to fund its budget deficit, which is expected to widen to as much as 3.2% of gross domestic product. — B.M. Laforga with Reuters

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