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Yields on reissued bonds drop on strong demand

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THE GOVERNMENT made a full award of the reissued Treasury bonds (T-bonds) on Tuesday at an average rate lower than secondary market levels as the offer fetched robust demand, with investors looking to lock in high yields amid expectations of a Bangko Sentral ng Pilipinas (BSP) cut as early as next month.

The Bureau of the Treasury (BTr) raised P30 billion as planned via the reissued 20-year bonds it auctioned off on Tuesday as total bids reached P114.896 billion, or almost four times the amount on the auction block.

The bonds, which have a remaining life of seven years and nine days, were awarded at an average rate of 6.286%. Accepted yields ranged from 6.28% to 6.29%.

The average rate of the reissued seven-year bonds rose by 33.8 basis points (bps) from the 6.624% fetched for the series’ last award on June 4, but was 171.4 bps lower than the 8% coupon for the issue.

This was also 9.2 bps lower than 6.378% quoted for the seven-year bond — the tenor closest to the remaining life of the papers on offer — and 4.9 bps below the 6.335% seen for the same bond series at the secondary market before Tuesday’s auction, based on PHP Bloomberg Valuation Service Reference Rates data provided by the BTr.

To accommodate the strong demand seen for Tuesday’s offer, the BTr opened its tap facility window to raise P5 billion more via the bonds at the same average rate.

The BTr fully awarded the bonds as the offer was oversubscribed and as the issue fetched yields below prevailing secondary market rates, it said in a statement after the auction.

Tuesday’s award brought the total outstanding volume for the series to P343.3 billion, it added.

The government fully awarded its offer amid “strong demand as investors with excess liquidity are now looking to extend duration in anticipation of rate cuts from BSP,” a trader said in a text message.

The bonds fetched lower rates following the “unusually huge” amount of bids seen for the offer “after local monetary officials reiterated a possible local policy rate cut as early as August 2024 that could even come ahead of a possible US Federal Reserve rate cut,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort likewise said in a Viber message.

BSP Governor Eli M. Remolona, Jr. last month said the Monetary Board may deliver its first rate cut in over three years at its Aug. 15 review — the only policy meeting scheduled in the third quarter — as they expect inflation to continue easing this semester.

The Monetary Board could reduce borrowing costs by 25 bps in the third quarter and by another 25 bps in the fourth quarter, he said.

The BSP last month kept its policy rate at a 17-year high of 6.5% for a sixth straight meeting after raising interest rates by a cumulative 450 bps from May 2022 to October 2023.

On Monday, Mr. Remolona said the better-than-expected June inflation print gives them “a bit more scope for easing” by next month.

Headline inflation eased to 3.7% in June from 3.9% in May. This was below the 3.9% median estimate in a BusinessWorld poll of 14 analysts. The June consumer price index (CPI) was within the BSP’s 3.4-4.2% forecast for the month, and also marked the seventh straight month that inflation settled within the central bank’s 2-4% annual target.

For the first six months, the CPI averaged 3.5%, slightly faster than the BSP’s 3.3% full-year forecast.

The central bank chief also reiterated that the BSP does not need to wait for the Fed before it begins cutting rates.

T-bond yields also dropped following “signals on additional national government foreign bond sales for the rest of this year that could somewhat hedge and help reduce the need for more local borrowings,” Mr. Ricafort added.

The government is looking to issue Japanese yen-denominated and US dollar-denominated bonds within the year, Finance Secretary Ralph G. Recto said on Monday.

It plans to borrow $5 billion this year, of which $2 billion was raised from the issuance of global bonds last May. This leaves $3 billion that has yet to be raised.

Meanwhile, the Philippines last issued Samurai bonds in April 2022, raising ¥70.1 billion.

The BTr wants to raise P215 billion from the domestic market this month, or P100 billion from Treasury bills and P115 billion via T-bonds.

The government borrows from local and foreign sources to help fund its budget deficit, which is capped at P1.48 trillion or 5.6% of gross domestic product for this year. — AMCS

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