RATES OF government securities on offer this week will likely decline slightly on ample demand and as bond yields settle near the headline inflation rate.

The Bureau of the Treasury (BTr) on Monday will auction off P20 billion in Treasury bills (T-bills), broken down into P5 billion each in 91- and 182-day papers and P10 billion in 364-day securities.

On Tuesday, the BTr will offer P30 billion in reissued three-year Treasury bonds (T-bonds) carrying a coupon rate of 3.5% and with a remaining life of two years and 10 months.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort expects rates for the T-bills to be “steady to slightly lower” while a bond trader said these will likely move “sideways with slight downward bias of around five basis points (bps).”

“Some of the PHP BVAL (Bloomberg Valuation Service) yields have already gone down so much to the point that some tenors are already close or even below the inflation rate of 2.1% (in May). Thus, any further easing could be limited in view of this,” Mr. Ricafort said Sunday via Viber, adding that yields below the inflation rate are already considered “negative rates” by investors.

“The latest auctions may be an indication that downward momentum of yields may be slowing down,” a bond trader said via Viber.

“While there is still some demand, the market starts to become cautious as the BSP (Bangko Sentral ng Pilipinas) stated that current monetary policy seems appropriate at the moment,” the trader added.

Last week, the BTr hiked the volume of T-bills it awarded to P26 billion from the original P20-billion program as bids soared and rates moved sideways.

Broken down, it raised P7 billion via the 91-day T-bills, up from the P5-billion program, at a lower average of 2.046% compared to the 2.058% fetched in the auction last May 25. It also borrowed P5 billion as planned from 182-day T-bills at the average yield of 2.118%.

Meanwhile, it accepted P14 billion in 364-day papers from the programmed P10 billion at an average rate of 2.42%, down from 2.508% previously.

For the three-year T-bond auction, Mr. Ricafort said yields could range between 2.4% and 2.5% while the bond trader sees it settling within 2.55% to 2.7%.

The BTr fully awarded the P30 billion in reissued three-year bonds it offered on May 12 at a lower average rate of 2.946%.

At the secondary market on Friday, the three-month, six-month and one-year T-bills fetched rates of 2.072%, 2.171% and 2.454%, respectively, while the three-year T-bond was quoted at 2.582%, according to the PHL BVAL Reference Rates.

Mr. Ricafort said there is still room for the BSP Monetary Board (MB) to slash benchmark interest rates by 25 bps considering benign inflation and also “to prevent a situation of net negative interest rate” where inflation, serving as the floor for key rates, will be higher than net interest rate returns.

“Fundamentally, key local policy rates, net of taxes, should remain above the inflation rate (as a floor) to maintain positive net interest rate return for investors,” Mr. Ricafort said.

“Short-term local interest rate benchmarks (PHP BVAL yields), the 7-day TDF (term deposit facility) auction yields, and the Treasury bill yields recently have been slightly above 2%, way below the key BSP overnight rate currently at 2.75%, already a new record low, meaning the markets have already factored in a possible cut in local policy rates,” he added.

BSP Governor Benjamin E. Diokno last week said the MB sees current benchmark rates as appropriate, saying further action will be based on the recovery of the economy.

The MB has slashed rates by a total of 125 bps so far this year after the 75 bps in reductions delivered in 2019.

Benchmark rates are currently at record lows, with the overnight reverse repurchase rate at 2.75% and the overnight deposit and lending rates at 2.25% and 3.25%, respectively.

“Sentiment on the local financial markets this week has been largely supported recently by S&P’s affirmation of the Philippine credit ratings at 2 notches above the minimum investment grade with stable outlook, despite the downgrade on some countries worldwide, thereby a sign of resilience and a strong vote of confidence by international investors on the country’s relatively stronger economic and credit fundamentals in recent years,” Mr. Ricafort said.

The government plans to borrow P170 billion from the local market in June: P110 billion via weekly T-bill auctions and the remaining P60 billion in Treasury bonds to be offered fortnightly. — Beatrice M. Laforga

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