July 12, 2022

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Gov’t fully awards reissued bonds at higher rates

THE GOVERNMENT fully awarded its offer of reissued 10-year Treasury bonds (T-bonds) on Tuesday at a higher average rate amid growing risks to the global outlook.

The Bureau of the Treasury (BTr) raised P35 billion as planned from its auction of reissued 10-year securities that have a remaining life of six years and six months on Tuesday, with total bids reaching P91.96 billion.

Rates awarded ranged from 6.625% to 6.8%, bringing the average yield for the bonds on offer to 6.76%, 235.1 basis points (bps) higher than the 4.409% fetched for the series when it was last offered on Feb. 18, 2020.

The average rate seen for the tenor on Tuesday was also 27.79 bps higher than the 6.4821% quoted for the seven-year bonds, the benchmark closest to the remaining life of the papers on offer, at the secondary market before Tuesday’s auction, based on the PHP Bloomberg Valuation Reference Rates published on the Philippine Dealing System’s website.

Meanwhile, it was 15.54 bps lower than the 6.9154% fetched for the 10-year tenor at the secondary market before the auction.

National Treasurer Rosalia V. de Leon said in a Viber message to reporters that the BTr made the full award at higher rates as given the current market environment, the government “needs to provide reasonable return to investors for the risks they are taking.”

Market players said despite the higher average rate, yields seen on Tuesday remained below market expectations amid strong demand for the papers offered.

“This auction surprised compared to the initial market estimate of 6.75% to 7% prior to the auction,” the first trader said. “So, the average yield printed lower than initially expected given the blockbuster demand, as evidenced by the total tenders submitted by the market.”

The second trader likewise said rates were at the lower end of expectations as there was ample demand for the offering.

Risks to the local and global economic outlook have been growing. Predictions of a recession in the United States due to the inversion of their yield curve amid the Federal Reserve’s hawkish policy path, inflation concerns, as well as fears of a slowdown in China amid a fresh surge in coronavirus cases, have caused volatility in financial markets.

Markets widely expect the Fed to raise rates by another 75 bps at their review this month amid strengthening labor market, with inflation data due July 13 expected to give the central bank more reason to be aggressive.

Most monetary authorities are now in the process of normalizing their pandemic-driven easy policies due to faster inflation amid rising food, energy and commodity prices exacerbated by the war in Ukraine, supply chain issues, and volatility in foreign exchange markets.

At home, Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla last week said the central bank is prepared to raise benchmark rates by 50 bps at their Aug. 18 meeting to keep inflation in check after the peso on Thursday breached the P56 level against the dollar to move closer to its record low.

He said the US central bank’s hawkish stance has placed “strong depreciation pressures” on global currencies such as the peso, which adds to inflation risks.

After closing at the P55 level on Friday and Monday, the peso on Tuesday finished at a fresh near 18-year low of P56.37 per dollar, data from the Bankers Association of the Philippines showed.

This is down by 39.1 centavos from the previous day’s close and is the worst finish since Nov. 5, 2004’s P56.38 a dollar. This is also just eight centavos away from the record low of P56.45 seen on Oct. 14, 2004, which the peso already hit intraday on Tuesday.

The Monetary Board has raised benchmark interest rates by a total of 50 bps so far this year via back-to-back 25-bp hikes at their May 19 and June 23 meetings, bringing the overnight reverse repurchase facility or policy rate to 2.5%.

A 50-bp hike at the August meeting will bring the BSP’s key rate to 3%. Mr. Medalla also said last week that the BSP may need to raise borrowing costs by at least 100 bps more this year to bring the policy rate higher than the midpoint of its 2-4% inflation target.

Following the August review, the Monetary Board has three more meetings scheduled for the year to be held on Sept. 22, Nov. 17 and Dec. 15.

Headline inflation reached 6.1% in June, the fastest in nearly four years. This brought the first-half average to 4.4%, above the central bank’s 2-4% goal but still lower than its 5% forecast for the year.

The BTr wants to raise P200 billion from the domestic market this month, or P60 billion via Treasury bills and P140 billion from T-bonds.

The government borrows from local and external sources to help fund a budget deficit capped at P1.65 trillion this year, equivalent to 7.6% of gross domestic product. — D.G.C. Robles