Gov’t rejects all bids for T-bonds as investors ask for higher yields

THE GOVERNMENT rejected all bids for the reissued 10-year Treasury bonds (T-bond) it offered yesterday as investors demanded higher rates amid market expectations of another rate hike from the local central bank.
The Bureau of the Treasury (BTr) opted to reject all bids for its P15-billion offer of reissued 10-year bonds on Tuesday, as tenders put forward by banks totalled P12.737 billion, below the amount the government wanted to borrow.
Had the BTr accepted all offers, the papers, which have a remaining life of nine years and six months, would have fetched an average rate of 7.64%, soaring by 129 basis points (bp) from the 6.35% recorded in the bond offer in May.
The Treasury also rejected all bids for the 10-year papers when they were offered last July 3.
The 10-year debt papers carry a 6.25% coupon.
At the secondary market prior to the auction, the papers were quoted at 7.5393%. The yield on the 10-year bond was unchanged at the market’s close.
After the auction, Deputy Treasurer Erwin D. Sta. Ana said the rates tendered by dealers were too high.
“Bids came in much higher than we expected given our initial survey from the [government securities eligible dealers] and based on where this security is trading on, hence the decision to fully reject,” Mr Sta. Ana told reporters yesterday.
He added that the recent tightening moves by the Bangko Sentral ng Pilipinas (BSP) were priced in by investors which led to a spike in rates.
The BSP has cumulatively raised rates by 100 bps since May, with rates currently ranging at 3.5-4.5%.
Another rate increase is expected during the September Monetary Board meeting, with some analysts predicting that the BSP will hike borrowing costs by another 50 bps.
“The market is reportedly expecting another one from the central bank, so those must be taken into account,” Mr. Sta. Ana said.
On Friday, BSP Governor Nestor A. Espenilla, Jr. hinted on another rate hike, saying the monetary authority will take “strong immediate action” to respond to emerging threats to prices and inflation expectations.
The average rise in prices of widely used goods picked up to a nine-year high of 6.4% in August due to higher food and oil costs.
“It could be several different factors, but it could be that participants are still waiting for what’s going to happen in the next couple of days,” Mr. Sta. Ana replied when asked why the 10-year bond offer was undersubscribed, noting that the market is also looking at the possible US Federal Reserve rate hike this month.
To cover for the previous rejections the BTr made, Mr. Sta. Ana said the government has enough cash on the back of “impressive” revenue collections made by the Bureau of Customs and the Bureau of Internal Revenue.
“To compensate for that, we would look into the collections… We still have that sufficient buffer that we have because of all these impressive revenue collections so we are okay.”
Meanwhile, a bond trader said the 10-year tenor is “not timely,” as appetite for long-term debt is expected to be weak with inflation at a fresh high and amid continued volatility in emerging markets.
“The 10-year-long bonds are not timely because the inflation number as well as the US Treasuries are up,” the trader said in a phone interview.
“There are problems in the emerging markets as well that’s why the BTr prompted to reject all bids.”
The government is set to borrow P300 billion from the domestic market this year through auctions of securities, offering P195 billion in Treasury bills and another P105 billion in T-bonds.
It plans to borrow P888.23 billion this year from local and foreign sources to fund its budget deficit capped at 3% of the country’s gross domestic product.
GLOBAL BONDS
Meanwhile, the BTr said it is still looking at offering dollar-denominated global bonds this year as it is still looking at market conditions.
“At this point, we are just looking to monitor what is happening in the RoP (Republic of the Philippines bond) space,” Mr. Sta. Ana said.
“Given what is happening externally [such as] the intensifying news about the trade war between the US and China [as well as] the [North American Free Trade Agreement] talks, we are just carefully monitoring where we are in terms of our dollar curve.”
In January, the government sold $2 billion worth of 10-year dollar bonds amid strong investor demand.
Aside from this, it is also looking at offering yen-denominated “samurai” bonds and yuan-denominated “panda” bonds within 12-18 months to maintain its presence in these debt markets. — Karl Angelo N. Vidal