T-bond yields go down as market awaits BSP cut

The government made a full award of the reissued 20-year Treasury bonds (T-bonds) it offered on Tuesday at a lower average rate than the previous award, as the market expects the Bangko Sentral ng Pilipinas (BSP) to kick off its easing cycle by next month.

The Bureau of the Treasury (BTr) raised PHP 30 billion as planned via the reissued 20-year bonds it auctioned off on Tuesday as total bids reached PHP 62.603 billion, or more than double the amount on the auction block.

The bonds, which have a remaining life of three years and one month, were awarded at an average rate of 6.009%. Accepted yields ranged from 5.97% to 6.034%.

The average rate of the reissued three-year bonds dropped by 55.9 basis points (bps) from the 6.568% fetched for the series’ last award on Nov. 29, 2022, and was also 261.6 bps lower than the 8.625% coupon for the issue.

This was likewise 6.2 bps below the 6.071% quoted for the three-year bond, the tenor closest to the remaining life of the papers on offer, at the secondary market before Tuesday’s auction, based on PHP Bloomberg Valuation Service Reference Rates data provided by the BTr. However, this was 2.7 bps higher than the 5.982% seen for the same bond series at the market.

The Treasury made a full award of its T-bond offer amid strong demand and as the average rate fetched for the papers was below the prevailing secondary market benchmark, it said in a statement after the auction.

“With its decision, the committee raised the full program of PHP 30 billion, bringing the total outstanding volume for the series to PHP 91.1 billion,” the BTr added.

The awarded yield for the bonds was within market expectations as investors await a possible rate cut by the BSP next month, a trader said by phone.

BSP Governor Eli M. Remolona, Jr. earlier said the Monetary Board may deliver its first rate cut in over three years at its Aug. 15 review — the only policy meeting scheduled in the third quarter — as they expect inflation to continue easing this semester.

The Monetary Board could reduce borrowing costs by 25 bps in the third quarter and by another 25 bps in the fourth quarter, he said.

The BSP last month kept its policy rate at a 17-year high of 6.5% for a sixth straight meeting after raising interest rates by a cumulative 450 bps from May 2022 to October 2023 to help tame elevated inflation.

The central bank last slashed benchmark borrowing costs by 25 bps in November 2020 to bring the policy rate to a record low of 2% to boost economic activity during the height of the coronavirus pandemic.

Mr. Remolona also said the better-than-expected June inflation print gives them “a bit more scope for easing” by next month.

Headline inflation eased to 3.7% in June from 3.9% in May. This was within the BSP’s 3.4-4.2% forecast and also marked the seventh straight month that inflation settled within the central bank’s 2-4% annual target.

For the first six months, the consumer price index averaged 3.5%, slightly faster than the BSP’s 3.3% full-year forecast.

The central bank chief also said the BSP does not need to wait for the US Federal Reserve before it begins cutting rates.

T-bond yields declined ahead of the Fed’s policy meeting this week, where it is widely expected to keep rates steady but set the stage for monetary easing by September, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort added in a Viber message.

The BTr is looking to raise PHP 220 billion from the domestic market in August, or PHP 80 billion from Treasury bills and PHP 140 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. — AMCS