YIELDS ON reissued seven-year Treasury bonds (T-bond) on offer on Tuesday will likely decline amid strong liquidity and as the market reacts to the “sooner-than-expected” cut in banks’ reserve requirement ratios (RRR).

The Bureau of the Treasury (BTr) is looking to raise P20 billion worth of reissued seven-year T-bonds on Tuesday with a remaining life of six years and three months.

A bond trader said the debt papers’ average rate will likely settle within the 4.35-4.45% range.

Robinsons Bank Corp. peso debt trader Kevin S. Palma said in a mobile phone message on Friday: “Yields of the 7-year paper for reissuance would be lower versus the last time it was auctioned in September.”

“Liquidity will be abundant towards end of the year, due to a jumbo-bond maturity amounting to P197 billion in November, alongside decisive central bank actions to cut banks’ RRR effective November and December by 100 basis points (bp) apiece,” Mr. Palma added.

Last Sept. 10, the Treasury made a partial award of its P20 billion offer of reissued seven-year bonds, raising just P10.399 billion even as total bids amounted to P22.149 billion. The notes fetched an average rate of 4.503%.

At the secondary market on Friday, the seven-year bonds were quoted at 4.528%, according to the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website.

In a statement on Thursday,the Bangko Sentral ng Pilipinas (BSP) said its policy-setting Monetary Board (MB) decided to slash the RRR of universal, commercial and thrift banks by another 100 bps effective December, bringing total reductions to their reserve ratios for this year to 400 bps.

The MB said the cut will also apply to the reserve ratio of non-bank financial institutions with quasi-banking functions (NBQBs).

This latest cut will follow a 100-bp reduction in all banks’ RRR announced on Sept. 27 which takes effect next month and will bring the reserve ratio of universal and commercial lenders to 14% by December, while the RRR of thrift banks will stand at four percent.

Meanwhile, the reserve ratio of rural banks, which will go down to three percent next month, was untouched.

On the other hand, the reserve ratio of NBQBs will be cut to 14% by December.

Mr. Palma said the market also expects the US Federal Reserve to slash its benchmark interest rates again by the end of the month.

“Bond bulls may continue to take center stage and dictate the tempo of this auction due to slew of bond-friendly catalysts such as expectations of a Fed cut towards end of the month,” he said.

“Icing on the cake is the sustained downward trend in domestic inflation outlook for the rest of the year along with prospects of a GDP (gross domestic product) growth rebound in the third quarter,” he added.

The BSP’s Economic Research department reported last week that headline inflation in the third quarter slowed further to 1.7% from the three percent clocked in the second quarter.

In September, inflation slowed to 0.9% due to lower prices on food and electricity, taking the nine-month average to 2.8%, well within the central bank’s 2-4% target band for 2019.

The government will release third-quarter GDP growth data on Nov. 7, while inflation data for October will be reported on Nov. 5.

The government is set to borrow P220 billion from the local market this quarter, broken down into P100 billion in Treasury bills and P120 billion via T-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 GDP. — Beatrice M. Laforga

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