Gov’t securities may fetch higher rates after policy hikes


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Government bond (GS) quotes on offer this week could rise on the back of continued central bank rate hikes over the past week and a weakened peso.

The Bureau of the Treasury (BTr) will offer P15 billion in Treasury bills (T-bills) Monday, made up of P5 billion each in 91-day, 182-day and 364-day debt securities.

On Tuesday, BTr will auction newly issued 20-year government bonds (T-Bonds) with a remaining term of 16 years and four months.

Traders expect yields on T-bills and T-bonds to rise at this week’s auction as central banks hiked their respective interest rates last week to combat elevated inflation.

“There have been a number of rate hikes from various central banks this week and it appears more are to come; Because of this, sentiment for bonds remains bearish,” said one trader.

The trader expects T-bill rates to rise 15-20 basis points (bps) from last week’s promised yields and sees the 20-year stock trading between 7.25% and 7.50%.

A second trader said T-bill rates should be 25-50 basis points higher due to the recent policy move by Bangko Sentral ng Pilipinas (BSP), while T-bonds could range between 7.25% and 7.50% , “to test whether the Bureau of the Treasury will subcontract at these levels.”

Rizal Commercial Banking Corp. chief economist Michael L. Ricafort said interest rates could still be higher given a depreciated peso.

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“New entry [low] for the peso exchange rate could lead to higher import prices and headline inflation as well as increasing the odds [a] further local rate hikes,” said Mr. Ricafort. “A surprise [or] a local rate hike outside of the peso stabilization cycle cannot be ruled out.”

The US Federal Reserve raised interest rates by a further 75 basis points last week while announcing larger rate hikes as inflation, at 8.3% in August, is still well above its 2% target. The central bank has hiked interest rates by 300 basis points since March, including two more moves of 75 basis points in June and July.

At home, BSP raised interest rates by 50 basis points to 4.25% on Thursday as forecast by 11 out of 15 analysts business world poll last week. It has hiked borrowing costs by 225 basis points since May in an attempt to curb rising prices.

The consumer price index rose to 6.3% yoy in August from a near four-year high of 6.4% the month before and 4.4% a year ago. It was the fifth consecutive month that inflation exceeded the 2-4% GNP target this year.

GNP Governor Felipe M. Medalla said last month that the Fed’s aggressive tightening also poses an additional risk to domestic prices due to its impact on the peso.

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The peso closed at an all-time low of P58.50 per dollar on Friday, down a centavo from its P58.49 fiData from the Bankers Association of the Philippines showed on Thursday.

The peso has weakened 14.71% or 7.5 pesos this year from its close of 51 pesos to the dollar last year.

“There is no intention of targeting a specific level for the exchange rate,” BSP Deputy Governor Francisco G. Dakila, Jr. said in a news conference following the rate hike decision. “That is not the political goal. When deciding on the appropriate monetary policy stance, the priority is to bring inflation back into the target range over the medium term.”

In the secondary market, Friday’s 91-, 182-, and 364-day T-Bills traded at 2.7762%, 3.7042%, and 3.9280%, respectively, based on the PHP Bloomberg Valuation Reference Rates used in the Philippine Dealing System were published website.

Meanwhile, the 20-year bond was trading at 7.2329%.

Last week, the Ministry of Finance partially issued its T-bill or similaronwardsuh, only taking bids on the six-month debt even though total demand hit 16.288 billion pesos, above its 15 billion pesos or whateveronwardsah.

The Treasury borrowed just 3.162 billion pesos over the 182-day securities, although bids reached 7.123 billion pesos. The average interest rate for the term increased 17.6 basis points (bps) to 3.810% and accepted interest rates ranged from 3.700% to 3.900%.

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Meanwhile, the government on Monday rejected all bids for 91-day T-bills, despite the bids for the tenor 5.965 billion. , achieved in its last successful award on September 5th.

BTr also refused to issue 364-day debt, with demand reaching just P3.2 billion against the P5 billion in the auction block. Had the government accepted all bids, the bond’s average interest rate would have risen 110.8 basis points to 4.890%, compared to 3.782% achieved on Aug. 22 for the term, which was the last successful bid.

Meanwhile, the newly issued 20-year bonds, due to be offered on Tuesday, were last auctioned on November 26, 2019, where BTr partially sold the paper at 12.271 billion pesos against an offer of 20 billion pesos.

The bonds received an average interest rate of 5.341% at that auction, which was 140.9 basis points lower than the 6.75% coupon earned on the bonds when they were first offered on January 22, 2019.

BTr plans to raise P200 billion from the domestic market this month, or P60 billion via T-Bills and P140 billion via T-Bonds.

The government is borrowing from local and external sources to fund a budget deficit limited to 7.6% of gross domestic product this year. — Diego Gabriel C Robles



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