Treasury bonds to fetch lower rates ahead of Fed

THE GOVERNMENT will likely fetch lower yields for reissued 20-year bonds to be auctioned off tomorrow as market participants await the policy decision of local and US central banks.

The Bureau of the Treasury (BTr) is offering on Tuesday P20 billion worth of reissued 20-year bonds with a remaining life of 19 years and six months.

“Yield on the 20-year (bonds) for reissue will be lower from its last auction, with its average yield seen at 4.95-5.05% area,” Robinsons Bank Corp. peso debt trader Kevin S. Palma said in a message on Sunday.

The government made a full award of the 20-year T-bonds when they were last offered on June 11, borrowing P20 billion as planned versus bids totalling P27.3 billion.

The bonds fetched an average rate of 5.17%, 154.6 basis points lower than the 6.716% quoted when the debt papers were issued in January and also below the 6.75% coupon.

At the secondary market on Friday, the 20-year bonds were quoted at 4.98%, according to the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website.

Another trader said market players are pricing in a possible cut in interest rates by the US Federal Reserve.

The US central bank is widely expected to trim rates when its policy-making Federal Open Market Committee meets on July 30-31. Economists see this as a move to counter headwinds brought by trade tensions as well as the slowing global growth.

Fed chair Jerome Powell earlier said the Fed will “act as appropriate” to sustain expansion as “crosscurrents” are weighing on the economy.

“There’s a possibility of a 25-basis-point cut in interest rates from the Fed. Market players will probably price in that,” the second trader said

The trader expects the 20-year bonds to fetch a rate between 4.9% and 5.1%.

“Onshore, there’s also a possibility of further monetary easing as soon as Aug. 8 meeting,” Mr. Palma added, as Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno hinted on more interest rate cuts.

Earlier, Mr. Diokno expressed commitment to cutting benchmark rates amid expectations of a rate cut from the Fed.

“Even before the position of the Fed, we are already committed to cutting,” the central bank chief said last July 12. “So that’s an additional input to our decision.”

Mr. Diokno also noted that the BSP will likely cut policy rates in the second semester before moving to reduce banks’ reserve requirement ratios (RRR) anew.

“All these possible developments coupled with infused liquidity from the RRR cut last week will drive demand for this auction,” Mr. Palma added.

After a 100-bp RRR cut across all banks on May 31, the BSP trimmed the reserve ratios of universal and commercial lenders and thrift banks by another 50 bps last June 28 to 16.5% and 6.5%, respectively.

Another 50-bp reduction was implemented last Friday, bringing the reserve ratios of big banks to 16% and thrift banks to 6% and completing the phased cuts the BSP announced in May.

The government is set 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. — Karl Angelo N. Vidal