THE GOVERNMENT did not award the 20-year reissued Treasury bonds (T-bonds) it offered yesterday as banks asked for returns higher than secondary market rates despite dovish remarks from the central bank and expectations of steady inflation amid external headwinds.

The Bureau of the Treasury (BTr) rejected all bids for its P20-billion offering of the reissued 20-year bonds, with total tenders reaching P30.71 billion.

Had the government made a full award of the offer, the average rate would have climbed to 5.356% from the 5.015% fetched when the papers were last auctioned off on July 30.

Prior to the auction, the 20-year notes fetched 5.181%, based on the PHP Bloomberg Valuation Service Reference Rates. This yield fell to 5.156% at the market’s close.

Deputy Treasurer Erwin D. Sta Ana said yields sought by banks went beyond the secondary market rate when they “should not spike that much” amid a manageable inflation outlook and possible cuts to benchmark interest rates when the Bangko Sentral ng Pilipinas (BSP) reviews its policy settings on Thursday.

“Bids came in higher than secondary market levels and even in the last auction, and we feel that given the inflation path and the actions from the BSP, we feel that the rates should not be heading where it is based on the bids,” Mr. Sta Ana told reporters after the auction on Tuesday.

“Probably, there could be some concern about continuing geopolitical tensions and of course the concern on oil prices and the last [US Federal Reserve] meeting wherein there are reports that it’s a hawkish cut by the Fed… Given that, there could be a possibility that dealers would think they cannot park funds in long tenors,” the official noted. “But we feel that oil prices is actually not a concern for now as [BSP Governor Benjamin E. Diokno] mentioned earlier, and you know there is a policy meeting wherein there is a possible rate cut…so we don’t see the oil issue as a catalyst for rising interest rates.”

One trader said players were unwilling to invest in longer-termed notes for low returns, hence the higher yields.

“Average bid that the BTr got was 5.356% so it’s higher than market expectations. The BTr wasn’t willing to borrow at this level for the 20-year paper which indicates that their outlook is still bullish…,” the bond traded said in a phone message.

“There’s demand…for it, though the average yield of 5.356% indicated a reluctance by investors to invest in a 20-year paper without being compensated with a higher yield,”the trader added.

The central bank’s Monetary Board will revisit policy settings on Thursday. The market is expecting another 25-basis-point (bp) cut from the BSP following reductions of the same magnitude announced during their May 9 and Aug. 8 reviews, which brought the overnight reverse repurchase, overnight deposit and overnight lending rates to 4.25%, 3.75% and 4.75%, respectively.

Mr. Diokno said on Monday that the central bank sees no need to adjust its inflation target and forecast for this year given “normalizing” oil prices in the global market following a spike in the wake of the Sept. 14 drone attack on Saudi Aramco’s facilities.

The BSP targets to keep inflation within 2-4% this year. Meanwhile, it sees inflation averaging at 2.6% for 2019 and 2.9% for next year and 2021.

The BSP chief has also said that the central bank is looking to cut big banks’ reserve requirement ratio (RRR) by another 100 bps before the year ends.

Currently, the RRR is at 16% for big banks and six percent for thrift banks following the phased 200-bp cut implemented after an off-cycle meeting last May. The reserve ratio of rural and cooperative lenders was also cut to four percent from five percent effective May 31.

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

It wants 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 — Beatrice M. Laforga

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