T-bonds may fetch higher rates

By Melissa Luz T. Lopez,
Senior Reporter

YIELDS on seven-year Treasury bonds (T-bonds) will likely inch slightly higher this week as market players stand cautious with bets for a third rate hike in the United States still live.

The Bureau of the Treasury (BTr) is looking to raise P15 billion in the reissued seven-year debt papers on Tuesday with a remaining life of six years and six months.

The debt notes fetched a 4.51% average yield when these were last offered in August, slightly higher than the 4.5% coupon rate assigned back in April. The papers were quoted at 4.3277% at the secondary market as of Friday afternoon.

Traders interviewed late last week said the debt notes will likely see rates move sideways with a slight upward bias compared to the market rate, with investors being “careful” in betting on seven-year papers.

“There will be demand, but at least half of that will be demanding higher yields… Overall, investors are more cautious in taking positions,” one trader said.

The trader expects yields to move sideways or slightly higher by five basis points to log within 4.35-4.425%, noting that expectations of a pickup in US inflation will push global interest rates upward.

Consumer prices in the US picked up by 0.5% in September, the fastest increase in eight months driven by a spike in gasoline prices amid production disruptions due to Hurricane Harvey. However, core inflation remained muted, Reuters said in a report.

“Any strong data would warrant the Fed[eral Reserve] to hike rates by December,” the trader added.

US policy makers are primarily looking at inflation and economic growth in timing its next wave of rate normalization, as these data paint the picture of the pace of economic recovery years after the Global Financial Crisis.

Separately, a second trader said rates for T-bonds could move sideways amid mixed signals from the Fed, with yields seen to fall within the 4.38-4.44% range.

“At the start of the week, yields were higher because of the hawkish statements of Fed officials, but the minutes turned out not to be hawkish. However, most of the data are all good for the US economy,” the second trader added.

“The market is pricing in a rate hike but it’s not yet that clear.”

Minutes of the Federal Open Market Committee’s Sept. 19-20 policy review released last week showed that central bank officials “expressed concern” over the low inflation readings tallied for the past few months, running up to the planned rate hike by yearend.

The second trader said bids for the government securities could reach as much as twice the offering, while the other expects demand to simply match the P15-billion auction volume set for the week.

Meanwhile, analysts at ANZ Research said they expect “decent demand” for this week’s auction amid ample liquidity observed over the past weeks. It added that the Treasury has enjoyed a “favorable” run rate in terms of its bond issuances this year.

“We estimate that the BTr has now raised 79% (bonds only) of their local currency funding need of P540.14 billion for the year (out of total funding need of P727.64 billion),” the global research firm said in a market report.

For this week, ANZ expects yields to settle within the 4.3-4.4% range.

The government plans to raise up to P150 billion from domestic sources this quarter, lower than the P195 billion programmed between July-September.