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T-bond rates to decline on BSP’s dovish stance

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THE GOVERNMENT will likely see lower yields for the reissued 10-year Treasury bonds (T-bond) to be auctioned off today following the central bank’s rate cut and amid dovish signals from the Bangko Sentral ng Pilipinas’ (BSP) chief.

The Bureau of the Treasury (BTr) is offering on Tuesday P20 billion worth of reissued 10-year bonds with a remaining life of nine years and five months.

Traders expect the bonds to fetch a lower rate versus the previous auction following dovish pronouncements from BSP Governor Benjamin E. Diokno.

“Looking at 4.15% to 4.30% range for 10-year reissue given the possibility of 100 bps (basis points) RRR cut before next MB (Monetary Board) meeting and another 25 bps policy cut on Sept. 26,” a bond trader said in a phone message on Sunday.

Robinsons Bank Corp. peso debt trader Kevin S. Palma said the BSP’s rate decision last Thursday will likely lead to lower rates for the bonds on offer, with the average yield expected to settle within 4.175%-4.275%.

“The central bank’s move did not disappoint bond market participants as Governor Diokno quickly pronounced a dovish rhetoric after he said that he still sees another 25-bp policy rate cut and a 100-bp cut in RRR within the year,” Mr. Palma said in a phone message on Sunday.




The government made a full award of the 10-year T-bonds when they were last offered on May 28, raising P20 billion as planned with total tenders amounting to P65.8 billion.

The bonds fetched an average rate of 5.644%, 31 basis points lower than the 5.954% quoted when the debt papers were issued in April. This was also well below the bonds’ 6.875% coupon.

At the secondary market on Friday, the 10-year bonds were quoted at 4.372% according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

At its fifth policy review for the year on Thursday, the BSP’s Monetary Board cut key policy rates by 25 basis points, bringing the overnight reverse repurchase rate to 4.25%, and the overnight deposit and lending rates to 3.75% and 4.75%, respectively.

This followed a “prudent pause” in June as well as a 25-bp cut last May that partially dialed back a cumulative 175-bp hike implemented through five meetings last year in order to arrest rising inflation that peaked at a nine-year-high 6.7% in September and October.

In a Bloomberg interview last Friday, Mr. Diokno said policy makers may slash key rates further in their next meeting in September or in the first few weeks of the fourth quarter.

In a separate interview with ABS-CBN News Channel, Mr. Diokno said banks’ RRR may be reduced by another 100 basis points before the Sept. 26 policy meeting.

Mr. Diokno said the already reduced RRR, which is currently at 16% for big banks after the phased 200-bp cut, “is still very high.”

The timing of RRR cut, he said, will still depend on liquidity, as the BSP watches if reductions earlier this year, which are estimated to have released more than P200 billion into the system, resulted in lending to productive economic activities.

Mr. Palma said developments abroad are also pushing investors to park their funds in local government securities.

“There are offshore factors that have been supporting demand for local bonds, such as lower US Treasury yields given the recent flare-up between the US-China trade tensions,” he said.

Last week, the People’s Bank of China devalued its own currency to 7 yuan against the dollar in retaliation against Washington’s plan to impose an additional 10% tariff on $300 billion worth of Chinese goods starting Sept 1.

Tensions between the two countries escalated further after the US called China a “currency manipulator.”

The government plans to borrow P230 billion from the domestic market this quarter through Treasury bills and 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 gross domestic product. — B.M. Laforga

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