Five-year bonds to fetch slightly higher rates amid Fed hike bets

By Melissa Luz T. Lopez,
Senior Reporter

TREASURY BONDS (T-bonds) on offer this week will likely fetch slightly higher yields, reflecting market caution as players await for cues from the United States Federal Reserve alongside bets that a rate hike may be warranted for the Philippines.

The Bureau of the Treasury is looking to auction off P15 billion worth of reissued five-year T-bonds on Tuesday, which have a remaining life of four years and three months.

Traders interviewed on Friday said the debt notes will likely attract strong demand, although investors will likely ask for slightly higher returns compared to the previous week.

“The movement of yields should be a little higher… We are tracking US Treasuries and so far, the projection is even the local [central bank] will be hiking. With that, there will be higher yields,” one trader said in a phone interview.

The trader said yields sought by players will likely range between 3.9-4%.

The five-year papers fetched a 4% coupon rate when they were first offered in January, and will mature by 2022. The Treasury made a full award when the five-year T-bonds were reissued in July at an average yield of 4.226%.

In a separate report, ANZ Research sad investors will “likely demand a higher yield” compared to the 3.93% midpoint quoted for bonds, noting that they expect the reissued papers to fetch a 4-4.1% yield this week.

Market players are pricing in a December rate hike from the Fed, which will come after the central bank unwinds its bond holdings starting this month.

Back home, some analysts said the Bangko Sentral ng Pilipinas (BSP) may be pressed to adjust its own policy rates in order to catch up with rising global yields, in order to keep the local economy competitive.

The BSP has kept its monetary policy stance unchanged over the last three years, except for “procedural” cuts made in June 2016 that ushered in the shift to an interest rate corridor. Currently, benchmark rates range between 2.5-3.5%.

Another trader said bets that inflation picked up in September from the previous month may also be prodding interest rates upward.

“The expectation for inflation is higher that’s why we expect bids at 4% because that’s where the market is comfortable. Investors still think of [Fed chair Janet L.] Yellen’s speech as well tax plans in the US — all these are leading towards higher yields,” the second trader said, quoting the five-year papers within a 3.95-4% range.

Inflation is expected to hit 3.2% in September, according to a BusinessWorld poll, up from 3.1% a month ago.

This falls within the 2.8-3.6% estimate given by the central bank’s Department of Economic Research.

Both traders said there will be sufficient demand for Tuesday’s offering, with total bids likely to reach at least 1.5 times to as much as twice the P15 billion on the auction block.

The first trader noted, however, that the Treasury may find room to decide whether it will accept higher returns sought for the papers.

The government plans to raise up to P150 billion from domestic sources this quarter, lower than the P195 billion programmed between July-September. This will be divided into P75 billion worth of 91-day, 182-day, and 364-day debt papers; as well as P75 billion in four, seven, and 10-year notes.