Rates of 5-year bonds to climb

TREASURY BONDS (T-bonds) on offer tomorrow are expected to fetch higher yields, tracking rates of US Treasuries, and as market players remain cautious amid expectations of a rise in global borrowing costs.

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 six months.

Bond traders said bids by financial institutions are expected to rise compared to the previous auction after major offshore central banks made hawkish statements on tightening policy rates.

“We are looking at 10 to 20 basis points ( bps) higher versus the auction during March, with reasons due to the change in market sentiments caused by central banks’ rhetoric on higher rates dominating the market,” one trader said by phone.

The trader was referring to the March 12 auction of reissued fiveyear T-bonds, where the Bureau of the Treasury raised P15 billion as planned from the securities with a remaining life of four years and 10 months. The bonds fetched an average rate of 4.132%.

Meanwhile, late last month, the world’s top central bankers — namely the US Federal Reserve, Bank of England (BoE), European Central Bank (ECB) and Bank of Japan — delivered what seems to be a collective message that quantitative easing is being put back in its box and interest rates are going up — and global markets are taking note.

Despite this, however, the trader said economic fundamentals at home remain intact, as shown by slower inflation last month.

The Philippine Statistics Authority reported last week that inflation came in at 2.8% in June, marking a slowdown from 3.1% in May, but higher than the 1.9% in June 2016.

The preliminary result fell within the 2.4- 3.2% forecast range of the Bangko Sentral ng Pilipinas for the month and put the year’s average at 3.1%, also within the government’s 2- 4% target band.

Similarly, another trader said by phone on Friday that returns to be sought by banks are expected to be 10-15 bps higher compared to the March auction.

“Bids for [Tuesday’s] auction will be higher due to generally higher rates of global bonds, so we will just be tracking global bonds that will also reflect on the T-bonds auction,” the trader said.

Reuters reported that global yields were on an uptrend last week, with markets anticipating the Fed to tighten monetary rates anew, and the ECB and BoE following suit soon after.

Meanwhile, the first trader said hawkish views from these central banks are yielding a stronger dollar across a basket of currencies, which will cause higher rates.

At the fixed-income market on Friday afternoon, the five-year debt papers were last quoted at 4.5039%.

Asked on how much demand will fare at tomorrow’s auction, one trader said, “Appetite might not be as strong, might be at most P15 billion or less. View on this tenor is quite odd, and is at the belly. So the demand will be driven by end-user demand.”

In contrast, the other trader said the papers may be 1.5 times oversubscribed as “healthy demand is seen on the short-end of the curve.”

For its part, ANZ Research said in its July 27 Asia Macro Strategy Weekly report that it expects rates for the five-year papers to range within 4.10 to 4.15%, with estimates based on the current yield curve.

“While we expect global headwinds to continue, this auction has the advantage of being the only 5-year issuance in [the third quarter],” analysts at ANZ Research stated.

It added that demand for tomorrow’s offering will be supported by a bond redemption worth P53 billion made on July 5.

“Indeed, net supply will turn negative in both July and August.

All said, foreign interest will be dampened by renewed weakness in the peso…,” ANZ Research said.

The peso hit fresh lows versus the dollar last week, with its weakest level for the year thus far seen last Thursday at P50.67-tothe-dollar. This is also its lowest showing in more than a decade or since it closed at P50.735 per dollar on Sept. 1, 2006.

The government is looking to borrow up to P180 billion from domestic sources this quarter through offerings of P90 billion worth apiece of both Treasury bills and T-bonds to fund its fiscal deficit.

It raised P150.602 billion from the sale of governmentissued papers during the first quarter, lower than its P180billion program.