T-bond rates expected to climb

Date issued: April 17, 2017

TREASURY BONDS (T-bond) on offer tomorrow are expected to fetch higher yields amid political noise offshore and as market players remain concerned over the domestic inflation outlook, which could affect near-term interest rates.

The government plans to raise as much as P15 billion in tomorrow’s auction of fresh seven T-bonds maturing on April 20, 2024.

Bond traders said in a phone interview over the weekend that banks may request for higher rates from the government for the T-bonds on offer, but with returns coinciding with secondary market rates.

“Given it will be a new issuance, we expect rates to be within 4.5% to 4.625%,” a trader.

“It’s a reasonable pricing. It’s not that high and not too low since it’s in line with the secondary market since market players would still want to ask for higher rates amid a higher interest rate environment,” the trader added.

At the fixed-income market last week, the seven-year debt papers were last quoted at 5.0557%.

Asked what factors could contribute to investors’ decisions for their bids, the trader said, “For now, when will the next monetary move be for the BSP (Bangko Sentral ng Pilipinas) and Fed[eral Reserve], if they will hike rates in the near term. Political situation abroad, however is usually priced in already.”

Global markets are anticipating the US central bank to raise rates at least two to three times this year after it hiked borrowing costs for the first time during its March 14-15 Federal Open Market Committee meeting by 25 basis points to between 0.75%-1%, shortly after policy makers decided to raise interest rates last December 2016.

Meanwhile, the BSP has kept its policy stance steady since September 2014, with benchmark rates currently ranging between 2.5% and 3.5%, while the reserve requirement imposed on big banks remains at 20%.

BSP Governor Amando M. Tetangco, Jr. had said the central bank still has room to keep local interest rates unchanged despite inflation clocking in at 3.4% in March, faster than the 1.1% seen a year ago and February’s 3.3%, but still within the central bank’s 2-4% target band.

Meanwhile, another trader said, “Our reference now is the T-bonds will be trading around 4.375% to 4.625%.”

“The range is wide because it’s a new issuance. Factors affecting this auction is still the inflation outlook and the supply on the long-end for the second quarter,” the trader added.

“On a side note, the geopolitical risks affecting global rates are already there, plus the Bureau of the Treasury was able to borrow a lump sum due to the RTB (retail Treasury bond) issuance that puts less pressure to accept high bids or unreasonable bids from the market since the government was able to borrow a huge amount,” the trader said.

The government raised P175 billion from its public offer of RTBs with a coupon rate of 4.25%, almost six times its initial P30-billion program. The offer ran from March 28 to April 6.

Asked if the market has appetite for the T-bonds on auction tomorrow, one trader said, “It looks like it’s going to be 1.5 times oversubscribed since there’s healthy demand for the belly and the long-end.”

Another trader said, “Appetite for securities now are more for the end user clients. Subscription could be up to twice the offer.”

The government plans to borrow up to P180 billion from the domestic market this quarter through offerings of P90 billion worth apiece of both Treasury bills and T-bonds to fund its fiscal deficit. The budget gap settled at P353 billion in 2016. -- J.M.D. Soliman

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