T-bill, bond rates may be mixed as market awaits Fed meeting

Rates of the Treasury bills (T-bills) and Treasury bonds (T-bonds) on offer this week may end mixed as the market expects the US Federal Reserve to adopt a dovish stance in their policy decision.

The Bureau of the Treasury (BTr) will auction off PHP 20 billion in T-bills on Monday, or PHP 6.5 billion in 91- and 182-day papers and PHP 7 billion in 364-day debt.

On Tuesday, the government will offer PHP 30 billion in reissued 10-year T-bonds with a remaining life of nine years and four months.

Yields on the T-bills and T-bonds on offer this week may mirror the mixed movements in secondary market rates on Friday, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The reissued 10-year bonds to be auctioned off on Tuesday could fetch yields ranging from 6.05% to 6.10%, a trader said in an e-mail.

At the secondary market, the 91- and 364-day T-bills saw their yields go down by 5.34 basis points (bps) and 6.16 bps week on week to end at 5.8616% and 6.0118%, respectively, based on PHP Bloomberg Valuation Service Reference Rates data as of Sept. 13 published on the Philippine Dealing System’s website. Meanwhile, the 182-day T-bill went up by 0.2 bp to fetch 5.9899%.

On the other hand, the 10-year bond saw its yield rise by 1.65 bps week on week to end at 6.0926%.

Secondary market yields were mixed on Friday amid expectations of a rate cut by the Fed at its Sept. 17-18 meeting, Mr. Ricafort said.

“Local yields traded 3-4 bps lower [on Friday] on some buying interest across the curve ahead of [this] week’s FOMC (Federal Open Market Committee) meeting. The Fed remains non-committal on the size of rate cut in its upcoming meeting; however, mixed economic data raises doubt of a 50-bp cut. Nevertheless, a dovish tone is still expected,” the trader likewise said.

The Federal Reserve is nearly as likely to deliver an outsized interest-rate cut this week as a more-usual-sized reduction, trading in rate-futures contracts suggested on Friday, as financial markets priced in a bigger chance that the Fed will move more aggressively, Reuters reported.

A quarter-point reduction at the Fed’s Sept. 17-18 meeting is still seen as the slightly more likely outcome, but only marginally so.

Futures tied to the Fed’s policy rate now reflect about a 47% chance that the Fed will cut its policy rate, currently in the 5.25%-5.5% range, by a half of a percentage point. That’s up from about 28% on Thursday.

The market move reflects increasing bets by traders that the Fed may try to head off deterioration in the labor market, rather than take a slower see-what-happens-next approach with a smaller opening reduction.

Fed Chair Jerome H. Powell last month said he would not want to see any further cooling in the labor market, and “the time has come” to cut rates.

Since then, other Fed policy makers have signaled their sympathy with that view, including San Francisco Fed President Mary Daly who said a weakening job market would be unwelcome. Fed Governor Chris Waller said he would support front-loading rate cuts should conditions merit.

The change in market sentiment amplifies a discussion that began in earnest at the Fed’s July 30-31 meeting, when “several” policy makers said there was already a “plausible case” to cut rates, according to minutes of the session — a fact that may leave some officials now advocating for a bigger increase in September if they think the Fed should have cut already. 

Mr. Powell, in comments at the Fed’s annual research symposium in Jackson Hole last month, made clear that rates would fall at the Fed’s September meeting. He was noncommittal, though, on how far or how fast the decline might be, or whether officials would open the door with a conventional quarter-point reduction or something larger.

Alongside the interest rate decision on Sept. 18, the Fed will issue new economic projections from policy makers that will indicate how far they anticipate reducing rates by the end of the year. Investors currently expect 1.25 percentage points of cuts by then, though markets have jockeyed back and forth between bets for smaller and larger cuts over a volatile month of trading.

The way data have evolved does suggest a quicker pace of cuts than suggested not only in June, when Fed policy makers penciled in just one 25-bp rate cut this year, but also than in March, when the median projection was for three quarter-point rate cuts by the end of the year.

Last week, the BTr raised PHP 22.6 billion from the T-bills, higher than the planned PHP 20 billion, as total bids reached PHP 64.515 billion or more than thrice the amount on offer.

Broken down, the Treasury borrowed PHP 6.5 billion as programmed from the 91-day T-bills as tenders for the tenor reached PHP 22.7 billion. The average rate for the three-month papers went down by 10.7 bps to 5.84%.

Meanwhile, the government hiked its award of 182-day securities to PHP 9.1 billion from the original PHP 6.5-billion plan as bids for the tenor reached PHP 21.51 billion. The average rate of the six-month T-bill stood at 5.98%, down by 2.2 bps week on week.

Lastly, the Treasury raised PHP 7 billion as planned via the 364-day debt papers as demand for the tenor totaled PHP 20.305 billion. The average rate of the one-year debt inched down by 1.1 bps to 6.029%.

On the other hand, the reissued 10-year bonds on offer on Tuesday were last auctioned off on July 16, where the BTr raised PHP 30 billion as planned at an average rate of 6.212%, below the 6.25% coupon.

The Treasury wants to raise PHP 195 billion from the domestic market this month, or PHP 80 billion through T-bills and PHP 115 billion via T-bonds.

The government borrows from local and foreign sources to help fund its budget deficit, which is capped at PHP 1.48 trillion or 5.6% of gross domestic product for this year. — AMCS with Reuters