Why it’s important to keep an eye on peso government securities

With our pandemic-battered economy, the government had to ramp up its spending in the past two years in order to make up for the decline in economic activity.

This meant more borrowing through the offer of peso government bonds or peso government securities (GS). These fixed income securities have an important role in the financial assets of investors with a sizeable portfolio. It can contribute to capital preservation as it provides reliable income and some resilience if the stock markets become volatile.

The eEffect of increased government borrowing

In June 2021, the Bureau of the Treasury (BTr) decided to increase its Fixed Rate Treasury Note (FXTN) auction size from PHP 70 billion to around PHP 140 billion monthly in June 2021.

From there, the BTr has been issuing PHP 35 billion worth of FXTNs every week, whenever they are able to get enough bids for a full or partial award.

Although growth concerns and unorthodox tools from the Bangko Sentral ng Pilipinas (BSP) have supported GS yields for most of the last two years, the peso yield curve ultimately bear-steepened, i.e., long-term yields rose faster than short-term yields, because of this supply pressure. Bear steepening happens when markets sell their holdings of long-term bonds in anticipation of higher inflation and more government borrowing.

Rising yields amidst aggressive bond issuance

In the BTr’s last couple of FXTN offerings, supply pressure has dampened demand for peso GS. The BTr is seen aggressively awarding its issuances at levels that are as much as 40 basis points (bps) higher than the last dealt level.

This led to defensiveness in bids, as players were unwilling to take on huge GS positions. As such, it would be more difficult for investors with existing positions in the affected tenors to sell their long-term peso bonds at favorable levels.

We expect the BTr to continue saturating 3- to 10-year bonds with additional supply, posing further upward risk on GS yields in these tenors. Moreover, since the economic policies of the new administration have yet to be laid out, the BTr may continue aggressively awarding their offerings while the key policy rate, or interest rate set by the BSP, is still low.

Moving forward with peso denominated government securities

So what should you do? On the one hand, we advise trading clients to keep their 3-to-10-year bond positions light. On the other hand, hold-to-maturity clients may strategically buy 7- to 10-year bonds above the 6% key level. That’s because they provide significant returns that will still perform better than historical figures even if the BSP hikes rates several times.

Still, it would be prudent to monitor your bond portfolio to maximize returns and preserve capital. A call to your investment specialist may be a good idea.