T-bill yields go down amid policy easing hopes

The government upsized the volume of Treasury bills (T-bills) it awarded on Monday as yields went down on strong demand and expectations of more rate cuts by the Bangko Sentral ng Pilipinas (BSP) this year amid easing inflation.

The Bureau of the Treasury (BTr) raised PHP 22.6 billion from the T-bills it auctioned off on Monday, higher than the planned PHP 20 billion, as total bids reached PHP 64.515 billion or more than thrice the amount on offer. This was also higher than the PHP 53.105 billion in tenders recorded at the Sept. 2 auction.

Broken down, the BTr borrowed PHP 6.5 billion as programmed from the 91-day T-bills as tenders for the tenor reached PHP 22.7 billion. The three-month papers were quoted at an average rate of 5.84%, 10.7 basis points (bps) lower than 5.947% recorded last week, with the government only accepting bids with this yield.

Meanwhile, the government hiked its award of 182-day securities to PHP 9.1 billion from the original PHP 6.5-billion plan as bids for the tenor reached PHP 21.51 billion. The average rate of the six-month T-bill stood at 5.98%, down by 2.2 bps from the 6.002% fetched last week, with the BTr only accepting tenders with this rate.

Lastly, the Treasury raised PHP 7 billion as planned via the 364-day debt papers as demand for the tenor totaled PHP 20.305 billion. The average rate of the one-year debt inched down by 1.1 bps to 6.029% from the 6.04% quoted last week, with accepted rates at 6.02% to 6.04%.

At the secondary market before the auction, the 91-, 182-, and 364-day T-bills were quoted at 5.9150%, 5.9879%, and 6.0734%, respectively, based on PHP Bloomberg Valuation Service (BVAL) Reference Rates data provided by the Treasury.

“The continual strong demand for short-tenored notes reflects increasing investor demand in securing high yielding returns ahead of further BSP rate cuts in the following months,” a trader said in an e-mail. “The lower awarded T-bill rates this week reflected lowered inflation expectations following the softer-than-expected August inflation rate.”

“Treasury bill average auction yields all slightly eased, similar to the slight weekly declines in the comparable short-term PHP BVAL yields after headline inflation eased to 3.3% in August,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort likewise said in a Viber message.

The BSP last month cut benchmark interest rates for the first time in almost four years amid an improving inflation and economic outlook, with its governor signaling at least one more reduction before the end of the year.

The Monetary Board on Aug. 15 reduced its policy rate by 25 bps to 6.25% from a 17-year high of 6.5%.

BSP Governor Eli M. Remolona, Jr. said they could cut rates by another 25 bps within the year. The Monetary Board’s last two policy-setting meetings this year are on Oct. 17 and Dec. 19.

Headline inflation eased to a seven-month low of 3.3% in August from 4.4% in July and 5.3% in the same month a year ago, the Philippine Statistics Authority reported on Thursday. This was within the BSP’s 3.2-4% forecast for the month and was well below the 3.7% median estimate in a BusinessWorld poll of 15 analysts.

In the first eight months, inflation averaged 3.6%, slightly above the BSP’s 3.4% baseline forecast but within its 2-4% annual target.

The slower-than-expected August print could justify further policy easing, analysts have said.

T-bill rates also declined amid “more dovish signals from most Fed officials recently would increase the odds of future Fed rate cuts, even the possibility of a larger 50-bp Fed rate cuts in the coming months to prevent the risk of recession,” Mr. Ricafort added.

Federal Reserve policy makers on Friday signaled they are ready to kick off a series of interest rate cuts at the US central bank’s meeting next week, noting a cooling in the labor market that could accelerate into something more dire in the absence of a policy shift, Reuters reported.

Their remarks were widely seen as endorsing a quarter-percentage-point reduction in the Fed’s policy rate, and leaving the door open to further and perhaps bigger moves should the job market continue to slow down.

Policy makers have kept the Fed’s benchmark borrowing rate in the current 5.25%-5.5% range since July 2023 after an aggressive rate-hiking campaign that began 18 months earlier in response to a surge in inflation.

“It is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate,” New York Fed President John Williams said at a Council on Foreign Relations event.

Speaking at the University of Notre Dame, Fed Governor Christopher Waller went further, saying he could support back-to-back cuts, or bigger cuts, if the data suggests the need.

“I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate,” Mr. Waller said.

Chicago Fed President Austan Goolsbee, who has for months signaled he thinks rates need to come down, also said he wants to calibrate policy based on data as it comes in.

“I don’t think what happens at the next meeting alone is what’s the most important,” Mr. Goolsbee said in an interview with CNBC, adding that it would be critical for the Fed to understand the trend of the data over the next several policy meetings.

Data published earlier on Friday showed monthly job gains have averaged 116,000 in the June-August period, below what many economists estimate is needed to meet the job-growth needs of an expanding population.

All three policy makers noted progress on bringing inflation down, with Mr. Waller saying it is now on the “right path” to get to the Fed’s 2% goal.

Traders of futures that settle to the Fed’s policy rate are now pricing a 75% chance that the US central bank will start by cutting its policy rate by 25 bps.

They are pricing in a 4.25%-4.5% policy rate by the end of this year, a level that implies a bigger rate cut at one of the central bank’s last two meetings of the year.

On Tuesday, the BTr will offer PHP 30 billion in reissued seven-year Treasury bonds (T-bonds) with a remaining life of four years and eight months.

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