BTr partially awards bonds on hawkish Fed bets

The government made a partial award of the Treasury bonds (T-bonds) it offered on Tuesday at a higher average rate than secondary market levels amid expectations of hawkish signals from the US Federal Reserve this week.

The Bureau of the Treasury (BTr) raised just PHP 26.225 billion via the reissued 10-year bonds it auctioned off on Tuesday, lower than the PHP 30-billion program, despite total bids reaching PHP 53.131 billion.

The bonds, which have a remaining life of nine years and seven months, were awarded at an average rate of 6.754%. Accepted yields ranged from 6.68% to 6.78%.

The average rate of the reissued bonds went down by 7.1 basis points (bps) from the 6.825% fetched for the series’ last award on May 7. However, this was 50.4 bps above the 6.25% coupon for the issue.

This was likewise 4.5 bps higher than 6.709% quoted for the 10-year bond and 3.7 bps above the 6.717% 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 Treasury.

Tuesday’s T-bond award brought the outstanding volume for the series to PHP 141.9 billion, the BTr said in a statement.

“The awarded T-bonds today fetched higher amid expectations of hawkish guidance from the Fed meeting this week,” a trader said in an e-mail on Tuesday.

The Federal Open Market Committee was set to start a two-day policy meeting overnight, where it is expected to keep its target rate at the 5.25%-5.5% range for a seventh straight meeting.

The Fed will also update their economic and interest rate projections at this week’s meeting.

Officials have turned more hawkish since the last such release in March, when the median projection was for a reduction of three quarter points this year, Reuters reported. Markets are currently pricing in only 37 bps of cuts by December.

The peso’s persistent weakness against the dollar also led to the higher awarded T-bond yields, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

On Monday, the local unit closed at PHP 58.79 per dollar, dropping by 27 centavos from its PHP 58.52 finish on Friday, Bankers Association of the Philippines data showed.

Year to date, the peso has weakened by PHP 3.15 from its end-2023 close of P55.37 versus the greenback.

Mr. Ricafort added that T-bond rates likely rose after the 10-year US Treasury yield climbed to new one-week highs due to tempered expectations of a rate cut by the Fed this year after stronger-than-expected US jobs data.

On Monday, US Treasury yields rose as investors digested Friday’s labor market data and looked toward consumer price data and a Federal Reserve policy announcement this week, Reuters reported.

The yield on benchmark US 10-year notes rose 4.1 bps to 4.469% from 4.428% late on Friday, while the 30-year bond yield rose 4.8 bps to 4.5958%.

The 2-year note, which typically moves in step with interest rate expectations, rose by 1.5 bps to 4.8846% from 4.87% late on Friday.

US nonfarm payrolls expanded by 272,000 jobs last month, data showed, while revisions showed 15,000 fewer jobs created in March and April combined than previously reported. Economists polled by Reuters had forecast payrolls advancing by 185,000.

Average hourly earnings rose 0.4% after having slowed to a 0.2% rate in April. Wages increased 4.1% in the 12 months through May following an upwardly revised 4% annual rise the prior month.

The unemployment rate, however, edged up to 4% from 3.9% in April, breaching a level that had previously held for 27 straight months.

The BTr wants to raise P180 billion from the domestic market this month, or P60 billion from Treasury bills and P120 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. — A.M.C. Sy with Reuters