Treasury fully awards reissued 20-year bonds at lower yields

The government made a full award of the reissued Treasury bonds (T-bonds) it auctioned off on Tuesday at a lower average rate ahead of a cut in banks’ reserve requirement ratios (RRR) and amid expectations of further monetary policy easing at home and abroad.

The Bureau of the Treasury (BTr) raised PHP 25 billion as planned via the reissued 20-year bonds on Tuesday as total bids reached PHP 44.147 billion, or almost twice the amount on offer.

This brought the outstanding volume for the series to PHP 127.7 billion, the Treasury said in a statement.

The bonds, which have a remaining life of 19 years and eight months, were awarded at an average rate of 5.861%. Accepted yields ranged from 5.75% to 5.899%.

The average rate of the reissued papers fell by 33.7 basis points (bps) from the 6.198% fetched for the bonds when they were last awarded on Aug. 28. This was also 101.4 bps lower than the 6.875% coupon rate for the issue.

However, the average rate was 3.3 bps above the 5.828% quoted for the same bond series and 11.6 bps higher than the 5.745% fetched for the 20-year bond at the secondary market before Tuesday’s auction, based on PHP Bloomberg Valuation Service Reference Rates data provided by the BTr.

The government fully awarded its T-bond offer as the issue’s average rate was lower compared with the level fetched for previous award after the Bangko Sentral ng Pilipinas (BSP) announced that it would cut banks’ reserve ratios in October, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The RRR cut will free up almost P400 billion in liquidity, which banks can lend and put in instruments like government debt, he said.

A trader noted that the average rate fetched for the reissued 20-year bond was close to the 5.583% fetched for the one-year Treasury bill at Monday’s auction despite being a longer tenor.

The BSP on Friday said it will reduce the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% effective on Oct. 25.

It will also cut the RRR for digital banks by 200 bps to 4%, while the ratio for thrift lenders will be reduced by 100 bps to 1%. Rural and cooperative banks’ RRR will likewise go down by 100 bps to 0%.

Mr. Ricafort added that signals of further BSP rate cuts also caused T-bond rates to go down.

Finance Secretary Ralph G. Recto, who sits on the central bank’s Monetary Board, said on Tuesday the monetary authority can afford to slash interest rates further and match the size of the US Federal Reserve’s rate cut, Reuters reported.

“The Fed reduced by 50 basis points. I think we can also do half a percent,” Mr. Recto a told a media briefing.

Inflation would likely ease to 2.5% in September, he said, the slowest in nearly four years, after rising at an annual pace of 3.3% the previous month. Mr. Recto said that could settle at 3.4% this year, within the central bank’s 2% to 4% target range.

Slowing inflation allowed the central bank to cut its benchmark borrowing rate by 25 bps to 6.25% in August, its first rate cut since November 2020, ahead of major central banks, including the Fed.

The Fed started cutting rates on Sept. 18 with a larger-than-usual half-percentage-point reduction, which will likely be followed by a 25-bp cut in both November and December, according to a Reuters poll.

BSP Governor Eli M. Remolona, Jr. had earlier flagged there was room for one more interest rate cut this year. The BSP’s next meeting is on Oct. 17.

Tuesday’s T-bond auction was the last for the month. The government raised the planned PHP 115 billion from long-term papers in September as it made full awards at all its auctions and even made a tap facility award of reissued 10-year bonds worth PHP 5 billion on Sept. 17 amid strong demand.

The BTr has yet to release its domestic borrowing plan for the fourth quarter. — A.M.C. Sy with Reuters