T-bonds fetch lower rates on BSP, Fed easing bets

The government made a full award of the reissued Treasury bonds (T-bonds) it offered on Tuesday as yields declined on expectations of rate cuts from the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve in the coming months.

The Bureau of the Treasury (BTr) raised PHP 25 billion as planned via the reissued 20-year bonds it auctioned off on Tuesday as total bids reached PHP 54.601 billion, or more than double the amount on offer.

This brought the outstanding volume for the series to PHP 164.3 billion, the Treasury said in a statement.

The bonds, which have a remaining life of 14 years and five months, were awarded at an average rate of 6.103%. Accepted yields ranged from 6.05% to 6.125%.

The average rate of the reissued papers dropped by 67.8 basis points (bps) from the 6.781% fetched for the series’ last award on June 19. This was also 64.7 bps lower than the 6.75% coupon for the issue.

It was likewise 0.9 bp below the 6.112% seen for the same bond series and 3.4 bps lower than the 6.137% quoted for the 15-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.

The government fully awarded its T-bond offer as the average rate fetched was lower than the bond series’ prevailing secondary market rate and previous average yield quoted for the issue, the BTr said.

The T-bonds auctioned off on Tuesday fetched lower yields amid “aggressive buying” for long tenors as the market expects the monetary easing cycles of both the BSP and the Fed to extend until next year, a trader said in a phone interview.

The BSP’s first rate cut in nearly four years and signals of more cuts ahead, as well as expectations that it would match future Fed easing moves, led to the lower awarded yields for the T-bonds on offer, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort likewise said in a Viber message.

The Philippine central bank on Thursday cut benchmark interest rates for the first time in almost four years to mark the start of a “calibrated” easing cycle amid an improving inflation and economic outlook, with the BSP chief signaling at least one more reduction before the end of the year.

The Monetary Board reduced its target reverse repurchase rate by 25 bps to 6.25%. This was in line with the expectations of nine out of 16 analysts surveyed in a BusinessWorld poll.

Prior to the cut, the BSP kept its policy rate at an over 17-year high of 6.5% for six straight meetings following cumulative hikes worth 450 bps between May 2022 and October 2023 to combat inflation.

“With inflation on a target-consistent path, the current macroeconomic outlook supports a calibrated shift to a less restrictive monetary policy stance,” BSP Governor Eli M. Remolona, Jr. said at a briefing.

He said they could cut rates by another 25 bps within the year. The Monetary Board’s remaining policy-setting meetings this year are scheduled for Oct. 17 and Dec. 19.

Analysts expect the BSP’s easing cycle to continue until next year amid stabilizing inflation, with at least 100 bps in rate cuts seen in 2025.

Meanwhile, the BSP expects the Fed to begin cutting rates next month, possibly by 50 bps, and by 100 bps more until the end of 2024 and by 125 bps in 2025, Mr. Remolona said last week.

Fed policy makers have in recent days signaled a potential rate easing in September, priming markets for a similar tone from Fed Chair Jerome H. Powell and other speakers at the annual meeting of global central bankers and other policy makers in Jackson Hole, Wyoming, Reuters reported.

Investors largely expect Mr. Powell to acknowledge the case for a rate cut and will parse his words for cues on whether the Fed will start with a 25-bp cut or a 50-bp cut in September.

While labor market deterioration led to the markets expecting a bigger rate cut in September, data since has been mixed, with upbeat retail sales still signaling a resilient consumer.

Markets are pricing in a 24.5% chance of a 50-bp cut in September, down from 50% a week ago, with a 25-bp reduction having odds of 75.5%, the CME FedWatch Tool showed. Traders are pricing in a total of 93 bps of cuts this year.

A slim majority of economists polled by Reuters expect the US central bank to cut rates by 25 bps at each of the remaining three meetings of 2024.

The BTr wants to raise PHP 220 billion from the domestic market this month, or PHP 80 billion through 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. — A.M.C. Sy with Reuters