T-bonds to fetch higher yields
TREASURY BONDS (T-bonds) on offer tomorrow will likely fetch higher yields as market players remain cautious of heightened chances that interest rates may increase during the US Federal Reserve’s policy meeting next month and amid lingering uncertainties abroad as well as inflation concerns at home.
The government plans to raise as much as P15 billion in tomorrow’s auction of reissued fiveyear T- bonds with a remaining life of four years and 11 months.
Bond traders said in a phone interview over the weekend that banks will likely request for higher returns from the government for the T-bonds on offer due to persisting political noise and uncertainties offshore, particularly in the United States and Europe, as well as risks of higher domestic inflation, but with demand for the papers still expected to remain strong.
“We’re looking yields at 15-20 basis points ( bps) higher compared to the last auction considering there’s a revival of reflation in the US,” one trader said.“So that means the sense of spending has been revived, that the Trump government wants to spend and they can spend a lot.”
The T-bonds on offer tomorrow were originally issued last Jan. 26 with a coupon rate of 4%. The government fully awarded the fresh five-year bonds maturing on Jan. 26, 2022 after investors swarmed the debt notes amid excess liquidity in the local financial system.
The Bureau of the Treasury raised P15 billion in fresh funds as planned at that auction, with the offer seeing strong demand after banks wanted to buy as much as P35.603 billion, more than twice the government’s offer. The 2022 T-bonds also fetched an average rate of 3.876%, higher by 63 basis points from the previous rate of 3.246%.
At the fixed-income market on Friday, the five-year bonds were last quoted at 3.9297%.
The trader noted that investors are also taking into consideration heightened chances of the US central bank tightening policy settings anew during its March 13-14 meeting after Fed Chair Janet L. Yellen hinted on an upcoming rate hike during her economic testimony before Congress last week.
The Fed Chair said regulators may need to increase borrowing costs again next month, shortly after they decided to raise rates last December 2016, as Ms. Yellen noted that delaying the move could bring the Fed “behind the curve” and cause them to hike interest rates faster that would lead to a recession.
“On top of government spending, markets are also looking at the hawkish statements coming from the Fed speaker and Chair Yellen that’s making trade elevate the yield,” the trader said.
Philadelphia Fed President Patrick Harker also made hawkish statements earlier this month, saying that he will support hiking interest rates during the US regulator’s March meeting should key US job reports remain solid.
“The usual supply concern is there because auctions are more frequent now and we’re also keeping an eye on domestic inflation,” the trader added.
Despite uncertainties, the trader said demand is present and the papers may be oversubscribed by one to two times.
“But all people now are datadependent. Because of global uncertainties, nobody is willing to put a bet on an interest rate hike scenario,” the trader noted. “Locally, we are now expecting higher inflation after the BSP (Bangko Sentral ng Pilipinas) said that inflation is now tilted on the upper end of the range.”
The BSP adjusted its inflation projections for 2017 and 2018 to 3.5% from 3.3% and 3.1% from 3%, respectively.
“Now, everyone is just also waiting what the Fed will do. The market’s appetite for tomorrow’s T- bonds would highly depend on what they would think would happen in five years. It’s for the Bureau of the Treasury to decide whether they will accept bids higher than 4% or not,” the trader said.
The government plans to borrow up to P180 billion from the domestic market this quarter through offerings of P90 billion worth of both Treasury bills and T-bonds to fund its fiscal deficit. —