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Seven-year bonds may fetch lower yields

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SEVEN-YEAR Treasury bonds (T-bond) on offer on Tuesday are seen to fetch slightly lower rates on bets of fresh monetary easing by the central bank later this month and ahead of initial trade talks between the United States and China.

The Bureau of the Treasury will be offering P20 billion worth of reissued seven-year T-bonds tomorrow with a remaining life of six years and five months.

Two traders interviewed said the bonds’ yields may fall within the 4.3% to 4.4% range, lower than yields seen during the previous auction.

“Yields have been going up, especially on the long end. Traders remain cautious due to a lack of strong catalysts to drive the market. Now, most of the traders are waiting on RRR (reserve requirement ratio) cut or potential cut on monetary policy [rates] (by the Bangko Sentral ng Pilipinas),” a bond trader said by phone on Friday.

Amalgamated Investment Bancorporation fixed-income peso trader Rocky A. Bautista said improvements overseas have driven rates higher, with players locking in gains as yields on US government securities rose as the US and China said they will hold fresh trade talks in October.

“We can still expect strong demand in this coming auction as domestic liquidity is very much still there,” Mr. Bautista said.




The Treasury raised P20 billion via the reissued seven-year T-bonds it auctioned off on July 16 as the offer was more than thrice oversubscribed, with total bids reaching P74.94 billion.

The bonds, which carry a coupon of 6.25%, fetched an average rate of 4.845%, 89.8 basis points (bps) lower than the 5.743% rate logged on May 15.

At the secondary market on Friday, the seven-year papers were quoted at 4.459%, according to the PHP Bloomberg Valuation Service Reference Rates.

BSP Governor Benjamin E. Diokno has hinted on further cuts to benchmark rates and big banks’ RRR within the year.

The central bank has cut benchmark interest rates by a total of 50 bps so far this year — by 25 bps each on May 9 and Aug. 8 — to 4.25% for the overnight reverse repurchase rate, 4.75% for overnight lending and 3.75% for overnight deposit, partially dialling back the 175-bp cumulative hikes triggered last year by successive multi-year high inflation that peaked at a nine-year high.

Headline inflation slowed to 1.7% in August from 2.4% in July and 6.4% in August 2018, the Philippine Statistics Authority reported on Thursday.

The August reading matched the 1.7% logged in September 2016 and was the slowest in three years or since the 1.3% inflation rate posted in August 2016. Last month’s inflation also fell at the midpoint of the BSP’s 1.3%-2.1% forecast.

Year to date, headline inflation is at three percent, well within the BSP’s 2-4% target range for 2019, albeit still above the central bank’s 2.6% forecast for the entire year.

Mr. Diokno said following the release of data on Thursday that the BSP will take the August inflation print into consideration when the Monetary Board holds its policy meeting on Sept. 26.

On the other hand, banks’ reserve ratios now stand at 16% for big banks and six percent for thrift banks after the phased 200-bp cut implemented after an off-cycle meeting last May. The RRR of rural and cooperative lenders was also cut to four percent from five percent effective May 31.

Reductions to lenders’ reserve ratios were estimated to have released some P200 billion of liquidity into the system.

Mr. Diokno has said he is committed to trim big bans’ RRR to a single-digit rate before his term ends in 2023.

Meanwhile, deputies from the US and China trade teams will talk in mid-September to prepare for negotiations between US Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin, and China’s Vice Premier Liu He in early October. Both sides agreed to take actions to create favorable conditions, but gave no details.

Neither side has signaled it would shift from positions that led to the impasse in May, when Beijing revised a draft of the trade deal, removing references to changes in Chinese law.

US officials have previously said that the resumption of talks would depend on China returning to the original May deal text, but there has been no sign that China has agreed to take that step.

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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