Rates of Treasury bills, bonds may drop further

Rates of the Treasury bills (T-bills) and Treasury bonds (T-bonds) on offer this week could decline further after the US Federal Reserve began its easing cycle and the Bangko Sentral ng Pilipinas (BSP) announced a reduction in lenders’ reserve requirement ratios (RRR).

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 25 billion in reissued 20-year T-bonds with a remaining life of 19 years and eight months.

Yields of the T-bills and T-bonds on offer this week could decline to track the week-on-week rally in secondary market rates, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The reissued 20-year bonds could fetch rates ranging from 5.75% to 5.8% on strong demand, with the offer expected to be oversubscribed by over three times, a trader said in an e-mail.

At the secondary market, the 91-, 182-, and 364-day T-bills saw their yields go down by 12.57 basis points (bps), 11.04 bps, and 8.69 bps week on week to end at 5.7359%, 5.8795%, and 5.9249%, respectively, based on PHP Bloomberg Valuation Service Reference Rates data as of Sept. 20 published on the Philippine Dealing System’s website.

The 20-year bond also saw its yield fall by 44.15 bps week on week to end at 5.7725% on Friday.

Secondary market rates declined last week as the Fed kicked off its easing cycle with a big cut, and after the BSP announced that it would cut banks’ RRRs effective next month, both analysts said.

The US central bank on Wednesday kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction that Federal Reserve Chair Jerome H. Powell said was meant to show policy makers’ commitment to sustaining a low unemployment rate now that inflation has eased, Reuters reported.

“We made a good strong start and I am very pleased that we did,” Mr. Powell said at a press conference after the Fed, noting its increased confidence that the country’s bout with high inflation was over, reduced its benchmark policy rate by 50 bps to the 4.75%-5% range. “The logic of this both from an economic standpoint and from a risk management standpoint was clear.”

In addition to approving the half-percentage-point cut on Wednesday, Fed policy makers projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year, and half of a percentage point in 2026, though they cautioned that the outlook that far into the future is necessarily uncertain.

The move marks a significant pivot in US monetary policy and a recognition of the Fed’s growing comfort with inflation continuing to ease to its target. It is currently about half a percentage point above it.

The Fed had kept its policy rate in the 5.25%-5.5% range since last July, when it ended an 18-month rate-hike campaign that was meant to control a surge in inflation, which soared in 2022 to a 40-year high.

Mr. Powell declined to declare victory on that front, but he did say inflation is now near the Fed’s 2% goal, and labor conditions are consistent with the central bank’s other goal of maximum employment.

Rate futures traders moved to price in even more easing than projected by the Fed, with the policy rate now expected to be in the 4.00%-4.25% range by end of this year.

Meanwhile, 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%.

Last week, the BTr raised PHP 20 billion as planned from the T-bills it auctioned off, with bids reaching PHP 77.899 billion, or more than thrice the amount on offer.

The BTr borrowed PHP 6.5 billion in 91-day T-bills as tenders for the tenor reached PHP 28.624 billion. The three-month debt was quoted at an average rate of 5.743%, 9.7 bps lower week on week. Accepted yields were at 5.72% to 5.774%.

The government also fully awarded PHP 6.5 billion in 182-day T-bills as bids for the tenor reached PHP 24.71 billion. The average rate for the six-month debt was 5.94%, down by 4 bps. Accepted rates were 5.9% to 5.965%

The Treasury likewise raised PHP 7 billion from 364-day T-bills as demand for the tenor reached PHP 24.565 billion. The average rate of the one-year debt fell by 5.6 bps to 5.973%. Accepted rates were 5.95% to 5.975%.

Meanwhile, the reissued 20-year bonds on offer on Tuesday were last auctioned off on Aug. 28, where the BTr raised PHP 25 billion as planned at an average rate of 6.198%, below the 6.875% 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. — A.M.C. Sy with Reuters