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T-bonds may fetch lower rates

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THE RATES on reissued 10-year Treasury bonds (T-bond) on offer on Tuesday will likely decline amid easing inflation and as the market waits for updates on the US-China trade war.

The government is looking to raise P20 billion worth of reissued 10-year via the reissued T-bonds with a remaining life of nine years and two months and a coupon rate of 6.875%.

The yields on the securities are expected to fall within the 4.5-4.6% range, according to Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC).

During the Aug. 13 auction, the Treasury borrowed P20 billion as planned via the 10-year papers as the offer attracted P65.2 billion in total bids. The papers fetched an average rate of 4.196%, 145 basis points (bp) lower than 5.644% quoted during the auction on May 28.

At the secondary market on Friday, the ten-year notes were quoted at 4.674% based on the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

“Market participants are closely watching any developments regarding the US-China trade spat and the possibility that domestic inflation could tiptoe higher in the coming months,” Robinsons Bank Corp. peso debt trader Kevin S. Palma said in a phone message over the weekend.

Last week, the Philippine Statistics Authority reported headline inflation slowed further to 0.8% in October from September’s print of 0.9% and the 6.7% a year ago. The PSA attributed this decline, which was the slowest in nearly three-and-a-half years, to the lower prices on heavily weighted food and non-alcoholic beverages, transportation and utilities.

Overseas, US President Donald Trump said over the weekend that negotiations on its trade dispute with China are moving “very nicely” but was firm on saying that it has to be a “great deal”.

Mr. Trump assured that China is also keen on closing in on a deal to put a stop to the prolonged war.

As part of the first phase of their deal, the two big economies had agreed to roll back tariffs that they imposed earlier.

Back home, Mr. Ricafort said the “major catalyst” for the auction will be the central bank’s move to reduce banks’ reserve requirement ratio (RRR) further which provided additional liquidity to the system.

“The RRR cuts for the first reserve week of November 2019 amounted to P125 billion, as additional supply of peso funds/liquidity into the financial system that could temper any upside on the auction yield,” he said in a phone message over the weekend.

The 100-bp cut announced in September took effect this month, bringing the reserve requirement ratios of universal and commercial banks to 15%, thrift banks to five percent, while that for rural banks now stands at three percent.

In October, the Bangko Sentral ng Pilipinas (BSP) announced another 100-bp reduction in the reserve ratios of universal, commercial and thrift banks by December, taking the overall reductions to their RRR to 400 bps for this year.

This cut will also apply to the reserve ratio of non-bank financial institutions with quasi-banking functions (NBQBs) to bring their RRR to 14% next month.

Meanwhile, the reserve ratio of universal and commercial lenders to 14% by December, while the RRR of thrift banks will stand at four percent.

Mr. Ricafort added that the recent appreciation of peso versus the greenback “would tend to support relatively lower local yield benchmarks as a stronger peso supports lower import prices and lower overall inflation.”

The government is planning to borrow P220 billion from the domestic 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 gross domestic product. — B.M. Laforga with Reuters





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