Peso GS Weekly: Investors anticipate fresh bond supply

WHAT HAPPENED LAST WEEK

The peso government securities (GS) market kicked off the new year with better selling interest as players continued to take profit from their positions coming from the strong rally that ensued last December.

For its first offering of the year, the Bureau of the Treasury (BTr) was able to fully award the Dutch auction for Fixed Rate Treasury Note (FXTN) 3-30, and set the coupon of the 3-year bond at 6.00%, or just within market expectations. Not much activity was initially observed in this tenor bucket given the stronger preference for longer-term bonds.

Some opportunistic buying interest was seen in the 9- to 10-year tenor bucket as some players try to take advantage of the relatively elevated yields to slowly reposition in peso GS.

To end the week, the December domestic data, which printed at 3.9% vs. the 4.0% estimate, was shrugged off by market participants. Clients were mostly sidelined waiting for fresh catalysts, while dealers were seen selling medium-term peso GS ahead of the 5-year Dutch auction today for FXTN 5-78. Bonds in the 5- to 7-year space were sold up to 6.15% and ended 10-20 basis points (bps) higher week-on-week (WoW).

Market Levels (week-on-week)

WHAT WE CAN EXPECT

Department of Finance (DOF) Secretary Benjamin Diokno said that he sees the key rate to be lower by 100 bps at 5.50% by the end of the year and that inflation will likely be in the middle of the Bangko Sentral ng Pilipinas’ (BSP) target band of 2-4% in 2025.

Although there have been signals on potential monetary easing within the year, market attention will still be focused on the influx of the fresh supply from the BTr, especially on the possibility of a jumbo issuance to fund the upcoming maturities in March.

In the meantime, all eyes will be on the 5-year Dutch auction today for the coupon setting of 5-year FXTN 5-78, where our indicative range stands at 6.125-6.250%.

We see value at 6.25% for the 5-year bond as it should provide more premium versus the current levels of longer-dated securities. We recommend investors to tactically position with better entry levels through the BTr’s upcoming bond auctions.