Reissued bonds fetch lower rates

The government made a full award of the reissued Treasury bonds (T-bonds) on Tuesday at lower rates as the offer was met with robust demand amid expectations of monetary easing by the Bangko Sentral ng Pilipinas (BSP).

The Bureau of the Treasury (BTr) raised PHP 30 billion as planned via the reissued 10-year bonds it auctioned off on Tuesday as total bids reached P96.605 billion, or more than thrice the amount on the auction block.

The bonds, which have a remaining life of nine years and six months, were awarded at an average rate of 6.212%. Accepted yields ranged from 6.18% to 6.223%.

The average rate of the reissued seven-year bonds dropped by 54.2 basis points (bps) from the 6.754% fetched for the series’ last award on June 11 and was 3.8 bps lower than the 6.25% coupon for the issue.

This was also 5.6 bps below the 6.268% quoted for the 10-year bond and 0.8 bp lower than the 6.220% 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 P20 billion more via the bonds at the same average rate.

The government made a full award of the reissued 10-year debt as the offer fetched lower rates on strong demand amid “growing confidence that the BSP will cut sooner and by at least 50 bps total for the year,” a trader said via text 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 450 bps from May 2022 to October 2023.

The T-bonds on offer fetched lower yields following dovish signals from US Federal Reserve officials, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

Fed Chair Jerome H. Powell said on Monday the three US inflation readings over the second quarter of this year do “add somewhat to confidence” that the pace of price increases is returning to the Fed’s target in a sustainable fashion, remarks that suggest a turn to interest rate cuts may not be far off, Reuters reported.

“In the second quarter, actually, we did make some more progress” on taming inflation, Mr. Powell said at an event at the Economic Club of Washington. “We’ve had three better readings, and if you average them, that’s a pretty good place.”

“What we’ve said is that we didn’t think it would be appropriate to begin to loosen policy until we had greater confidence” that inflation was returning sustainably to 2%, Mr. Powell continued. “We’ve been waiting on that. And I would say that we didn’t gain any additional confidence in the first quarter, but the three readings in the second quarter, including the one from last week, do add somewhat to confidence.”

Last week, the Labor department reported that its consumer price index fell in June from the month before, the first decline in four years. Economists now estimate the gauge the Fed uses for its inflation target, due out later this month, will show yearly price increases have eased closer toward 2%.

The betting among investors has tilted strongly towards the Fed starting rate cuts in September. Changes to the policy statement in July could provide a strong signal of that by updating how inflation is described and assessing how recent data has added to policymakers’ confidence that the pandemic-era outbreak of inflation has subsided.

After rapidly lifting interest rates starting in 2022 to combat the worst inflation outbreak since the 1980s, the Fed has left its benchmark policy rate unchanged since last July in a range of 5.25%-to-5.5%.

As Mr. Powell spoke, financial markets all but abandoned what had been rising bets on a July rate cut. Traders continue to expect a September rate cut followed by additional cuts in November and December, bringing the policy rate down to 4.5%-4.75% by yearend.

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. — A.M.C. Sy with Reuters