Cautious Fed may affect Treasury bill, bond rates

Rates of Treasury bills (T-bills) and Treasury bonds (T-bonds) on offer this week could track the mixed movements in secondary market yields amid cautious signals from US Federal Reserve officials.

The Bureau of the Treasury (BTr) will auction off PHP 15 billion in T-bills on Monday, or PHP 5 billion each in 91-, 182-, and 364-day papers.

On Tuesday, it will offer PHP 30 billion in new 10-year T-bonds.

T-bill rates could rise while T-bond yields could inch down, tracking secondary market movements on Friday, due to “cautious or less dovish” comments from Fed officials and higher global crude oil prices, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

At the secondary market on Friday, rates of the 91-, 182-, and 364-day T-bills went up by 2.17 basis points (bps), 6.99 bps, and 2.57 bps week on week to end at 5.3587%, 5.6655%, and 5.9991% respectively, based on PHP Bloomberg Valuation Service Reference Rates data published on the Philippine Dealing System’s website.

Meanwhile, the 10-year bond’s yield went down by 2.07 bps week on week to 6.2186%.

A steady stream of Fed officials, starting with Governor Christopher Waller on Tuesday, have pushed back on market expectations the central bank will embark on a path of fast reductions to interest rates. Mr. Waller said the Fed should proceed “methodically and carefully” until it is clear lower inflation will be sustained, Reuters reported.

On Friday, Chicago Fed President Austan Goolsbee said weeks more of inflation data need to be in hand before any decision could be made to cut interest rates.

In addition, Federal Reserve Bank of San Francisco President Mary Daly said there is still a lot of work left to do on inflation and it is premature to think rate cuts are around the corner.

Expectations for a cut from the Fed in March of at least 25 bps have dipped below 50% according to CME’s FedWatch Tool, with traders now targeting May as the likely month for a rate cut announcement.

The US central bank raised borrowing costs by a total of 525 bps from March 2022 to July 2023 to the 5.25-5.5% range.

It will hold its first meeting for the year on Jan. 30-31.

Meanwhile, crude prices dipped on Friday but were higher for the week as supply concerns arising from mounting tensions in the Middle East outweighed worries over softening demand.

There was an unwinding in yields at the secondary market on Friday after newly appointed Finance Secretary Ralph G. Recto said the government is looking to issue retail Treasury bonds (RTBs) this quarter, a trader said in an e-mail.

In February 2023, the government raised PHP 283.711 billion from its offering of the 2^9th tranche of 5.5-year RTBs with a coupon rate of 6.125%.

This week’s auctions could be well received amid “ample liquidity and strong portfolio demand,” the trader added.

The trader sees the 10-year T-bonds on offer this week fetching yields from 6.25% to 6.375%.

Last week, the BTr raised PHP 15 billion as planned via its offering of T-bills as total bids reached PHP 43.188 billion.

Broken down, the Treasury made a full PHP 5-billion award of the 91-day T-bills as tenders for the tenor reached PHP 13.752 billion. The average rate for the three-month paper rose by 12.4 bps week on week to 5.226%. Accepted rates ranged from 5.193% to 5.25%.

The government also raised PHP 5 billion as planned from the 182-day securities as bids for the tenor reached PHP 13.06 billion. The average rate for the six-month T-bill was at 5.685%, up by 10.3 bps, with accepted rates at 5.668% to 5.7%.

Lastly, the BTr borrowed the programmed PHP 5 billion via the 364-day debt paper as demand for the tenor stood at PHP 16.376 billion. The average rate of the one-year T-bill went up by 2.6 bps week on week to 5.999%. Accepted yields were from 5.985% to 6%.

The Treasury plans to raise PHP 195 billion from the domestic market this month, or PHP 75 billion via T-bills and PHP 120 billion through T-bonds.

The government borrows from local and foreign sources to help fund its budget deficit, which is capped at 5.1% of gross domestic product this year or PHP 1.39 trillion. — A.M.C. Sy with Reuters