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Three-year bonds may fetch lower rates

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THREE-YEAR Treasury bonds (T-bond) on offer tomorrow will likely fetch lower rates amid strong demand and following the speech of US Federal Reserve chief Jerome Powell over the weekend.

The Bureau of the Treasury (BTr) is offering on Tuesday P20-billion worth of reissued three-year bonds with a remaining life of two years and 10 months, maturing on July 4, 2022.

“Yield of the three-year paper up for reissuance will be lower from its last auction amid very strong demand for bonds on the front-end of the curve… Our local yield curve remains appropriately steep as inflation trend onshore is still expected to remain subdued as we approach yearend, Robinsons Bank Corp. peso debt trader Kevin S. Palma said in a phone message on Sunday.

Last July 2, the BTr issued the fresh three-year bonds with a coupon of 4.25%, which fetched an average rate of 4.803%. The government made a full award of its P20-billion offer which was three times oversubscribed, with tenders totalling P65.911 billion.

A trader said the bonds may fetch lower rates amid bets of further easing from the US Federal Reserve.

“Powell’s Jackson Hole consistent amplifies rate cut bets for Fed. This will give enough cushion for BSP (Bangko Sentral ng Pilipinas) to deliver another rate cut and reduction in RRR (reserve requirement ratio),” the bond trader said in a phone message over the weekend.

“Reinvestment requirements from P10-billion T-bill and P8.7-billion FXTN (fixed-rate Treasury note) maturities this week will propel demand for this auction further,” Mr. Palma added.

The bond trader sees the yield on the debt papers falling within 3.9% to 4.05%, while Mr. Palma gave a forecast range of 3.85%-3.95%.

At the secondary market on Friday, the three-year debt papers were quoted at 3.994% based on the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

The US economy is in a “favorable place” and the Federal Reserve will “act as appropriate” to keep the current economic expansion on track, Mr. Powell said on Friday in remarks that gave few clues about whether the central bank will cut interest rates at its next meeting or not.

The Fed cut rates for the first time in more than a decade last month, backing Mr. Powell’s verbal commitment to sustain the expansion with action. Mr. Powell on Friday made clear that commitment is still in place in a speech he gave at an annual Fed retreat at a Jackson Hole valley resort set against the Grand Teton mountains.

He said there are “significant” risks to the economy, including the trade dispute, the chaotic British exit from the European Union, tension in Hong Kong and signs of a global economic slowdown.

But he also said the domestic US economy is in a “favorable place” now and he stressed limits to the Fed’s ability to respond to the trade issues. He also said officials need to “look through” short-term turbulence, and stopped short of endorsing or signaling the pace and depth of rate cuts markets widely expect and that President Donald Trump has demanded.

There are “no recent precedents to guide any policy response to the current situation,” Mr. Powell said, adding that monetary policy “cannot provide a settled rulebook for international trade.”

Meanwhile, BSP Governor Benjamin E. Diokno earlier hinted on another cut in key policy rates and a 25-basis-point reduction in big banks’ RRR as early as next month.

The central bank’s Monetary Board at its last meeting slashed policy rates by 25 bps. Current interest rates now range from 3.75% to 4.75%.

Reserve quotas now stand at 16% for big banks and 6% for thrift banks following the last round of the 200-bp multi-phased reduction in all RRRs last July 26.

“The decision/announcement that BTr will not pre-fund the 2020 budget would also mean less supply for the rest of the year. Hence, we are in for lower rates,” the trader added.

Deputy Treasurer Erwin D. Sta Ana last week said domestic pre-funding for next year will have to depend on government’s catch-up plan. The Treasury also doesn’t plan to do any offshore pre-funding, he said.

The government is set to borrow P230 billion from the domestic market this quarter through T-bills and Treasury 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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