THE GOVERNMENT will likely see lower yields for its reissued seven-year bonds to be auctioned off tomorrow, as market participants price in possible interest rate cuts from the local and US central banks.
The Bureau of the Treasury (BTr) is offering on Tuesday P20 billion worth of reissued seven-year bonds with a remaining life of six years and seven months.
Kevin S. Palma, Robinsons Bank Corp. peso debt trader, expects the debt papers to fetch lower rates from the previous offer.
The Treasury made a full award of the of the seven-year bonds when they were last auctioned off on May 15. The IOUs fetched an average rate of 5.743%, 19.1 basis points (bp) lower than the 5.934% fetched in the previous offer.
Mr. Palma expects the rate of the seven-year bonds to land between 4.825% and 4.925%, while another trader said the debt notes will likely fetch an average rate from 4.95% to 5%.
“This auction could potentially have a very strong reception as market expects the Fed (US Federal Reserve) to cut its policy rates by at least 25 bps this coming Federal Open Market Committee (FOMC) meeting by the end of July,” Mr. Palma said in a phone message on Sunday.
Fed chair Jerome Powell, in a testimony before the US Congress last week, hinted on a possible cut in benchmark rates, saying the central bank will “act as appropriate” to sustain expansion as “crosscurrents” such as trade tensions and concern on global growth are weighing on the world’s largest economy.
The US was embroiled in a trade war against China as both countries hurled tariffs against each other’s imports. However, tensions cooled late last month after Washington and Beijing agreed to resume negotiations.
Mr. Powell’s dovish cues were reinforced by the minutes of FOMC’s June 18-19 meeting, wherein several Fed officials said a near-term interest rate cut is warranted to quell the effects of possible economic headwinds.
Apart from a possible Fed rate cut, Mr. Palma added that the auction on Tuesday will likely receive robust demand due to possible policy easing by the Bangko Sentral ng Pilipinas (BSP) as early as the Monetary Board (MB) meeting on Aug. 8.
BSP Governor Benjamin E. Diokno said the local central bank will likely cut policy rates in the second semester before moving to reduce banks’ reserve requirement ratio (RRR).
On May 9, the MB reduced interest rates by 25 bps amid a tamer price outlook after it implemented 175-bp worth of increases last year in five consecutive meetings due to a spike in inflation.
However, it took a “prudent pause” at its June 20 meeting to assess the impact of its prior monetary adjustments.
The government is set to borrow P230 billion from the domestic market this quarter through a mix of Treasury bills and T-bonds, lower than the P315 billion planned in April-June and the P300 billion placed on the auction block in the same period last year.
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. — Karl Angelo N. Vidal