Gov’t partially awards T-bonds at higher rates

The government made a partial award of the Treasury bonds (T-bonds) it offered on Tuesday as rates rose on expectations that inflation in the world’s largest economy remained sticky, which could push back the US Federal Reserve’s policy easing.

The Bureau of the Treasury (BTr) raised just PHP 11.528 billion via the reissued 20-year bonds it auctioned off on Tuesday, lower than the PHP 30-billion program, despite total bids reaching PHP 36.703 billion.

The bonds, which have a remaining life of 14 years and eight months, were awarded at an average rate of 6.95%. Accepted yields were 6.7885% to 6.994%.

The average rate of the reissued bonds rose by 35.7 basis points (bps) from the 6.593% fetched for the papers’ last successful award on Nov. 21, 2023. This was also 20 bps above the 6.75% coupon for the series.

The rate was likewise 4.52 bps higher than 6.9048% quoted for the 20-year bond and 4.99 bps above 6.9001% 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 award brought the total outstanding volume for the bond series to PHP 115.3 billion, the BTr said in a statement.

“The BTr awarded T-bonds at a higher rate amid expectations of robust US inflation reports this week,” a trader said in an e-mail.

Investors are awaiting the crucial inflation report this week that will likely shape the US rates outlook, Reuters reported.

Investors have had to dial back their expectations of rate cuts this year due to sticky inflation and are now pricing in 42 bps of easing this year, compared with 150 bps of easing anticipated at the start of 2024.

They are also pricing in a 60% chance of a cut in September, versus 75% a month earlier, according to CME FedWatch tool.

All eyes this week will be on the consumer price index (CPI) on Wednesday, which is expected to show that core consumer prices rose 0.3% month on month in April, down from 0.4% growth the prior month, according to a Reuters poll.

But before that, US producer price index was due to be released later on Tuesday, which analysts will parse through to get a sense of whether inflation is heading towards the Fed’s target of 2%.

The US central bank this month kept its target rate at the 5.25%-5.5% for a sixth straight meeting.

The T-bonds were partially awarded as rates rose due to renewed expectations of a rate cut by the Bangko Sentral ng Pilipinas (BSP) within this year after recent economic data, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

Headline inflation picked up for a third straight month to 3.8% year on year in April from 3.7% in March, the Philippine Statistics Authority reported last week. Still, this was slower than the 6.6% print in the same month a year a prior.

This was within the BSP’s 3.5-4.3% forecast for the April CPI and marked the fifth straight month that inflation settled within the central bank’s 2-4% annual target range.

The April CPI was also below the 4.1% median estimate in a BusinessWorld poll of 16 analysts.

For the first four months, headline inflation averaged 3.4%, lower than the BSP’s 3.8% full-year forecast.

Meanwhile, Philippine GDP expanded by 5.7% in the first quarter, faster than the 5.5% expansion logged in October-December 2023.

However, this was slower than the 6.4% growth seen in the first quarter of 2023 and was below the 5.9% median forecast of 20 economists in a BusinessWorld poll.

This also fell short of the government’s 6-7% full-year GDP growth target.

BSP Governor Eli M. Remolona, Jr. said before the release of both April CPI and first-quarter GDP data that if inflation settles within target and if economic growth is weaker than expected, the Monetary Board can cut rates as early as the third quarter. Otherwise, it could begin easing as late as the first quarter of 2025.

The Philippine central bank raised borrowing costs by a cumulative 450 bps from May 2022 to October 2023. It will meet to review policy on May 16, Thursday, where 17 of 19 analysts in a BusinessWorld expect it to keep its policy rate at a 17-year high of 6.5% for a fifth straight meeting.

The BTr wants to raise P210 billion from the domestic market this month, or P60 billion from Treasury bills and PHP 150 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