Fresh five-year Treasury bonds to fetch lower rates on inflation

FIVE-YEAR Treasury bonds (Tbond) on offer tomorrow are expected to fetch lower rates as inflation continues to ease.

The Bureau of the Treasury (BTr) is looking to raise P20 billion via fresh five-year T-bonds on Tuesday.

A bond trader interviewed on Friday expects the coupon of the five-year papers to settle within the 4.25-4.75% range, while Robinsons Bank Corp. peso debt trader Kevin S. Palma sees it falling between 4.25% and 4.375%.

“For the auction, indicators show that it will settle between 4.25% to 4.75%. The market will price in, of course, the low inflation [data],” the trader said by phone.

At the secondary market on Friday, the five-year debt notes were quoted at 4.379%, based on the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

The government last offered five-year T-bonds on Nov. 21 last year, where it auctioned off P15 billion in reissued papers with a remaining life of four years and three months. It made a full award of the offer. The bonds, which carry a coupon of 5.5%, were issued at an average rate of 7.003%.

Inflation slowed to 0.9% in September amid lower food and electricity costs, the Philippine Statistics Authority (PSA) reported earlier this month.

Prices of widely-used goods and services in September further cooled from 1.7% in August due to “softer price adjustments observed in nearly all commodities and base effects, coming from 6.7% in the same period in 2018.”

The September reading was the slowest since the 0.7% logged in April 2016, but matched the 0.9% in May 2015 and May 2016.

Last month’s headline print fell at the low end of the Bangko Sentral ng Pilipinas’ (BSP) 0.6%1.4% forecast for September.

For the nine months to September, headline inflation averaged at 2.8%, well within the BSP’s 2-4% target range for 2019 but still above the full-year forecast of 2.5%.

The trader said a huge volume of government securities are maturing next month, which will provide additional liquidity to the market.

“In fact, there’s an upcoming maturity in November, a big maturity…then the cues from abroad,” the trader added.

Aside from huge BTr redemption in November, Mr. Palma said there will be an “abundance” of liquidity in the market as the fresh 100-basis-point (bp) reduction in banks’ reserve requirement ratios (RRR) will also take effect next month.

“This auction could potentially have a very strong reception as investors anticipate an abundance of liquidity by November, fostered by the effect of the reserve requirement ratio cut coupled with a jumbo bond redemption,” Mr. Palma said.

The BSP announced last month that it will reduce lenders’ RRR by another 100 bps effective November to bring the reserve requirement of universal and commercial banks to 15% from 16%. The reserve ratios of thrift banks will also be cut to five percent from the current six percent, and to three percent from four

percent for rural and cooperative banks.

BSP Governor Benjamin E. Diokno last week said the central bank remains open to another round of RRR cuts within the year, but noted this will be datadependent.

Meanwhile, the BSP is done cutting benchmark rates for now, he said.

The Monetary Board has two more policy meetings left for the year — on Nov. 14 and Dec. 12 — although it can act on the reserve requirement in any of its weekly meetings.

On the external front, Mr. Palma said “demand for emerging market assets could also improve after the US and China reportedly agreed to a partial trade deal”.

The government is set to borrow P220 billion from the local market this quarter, broken down into P100 billion in Treasury bills and P120 billion via T-bonds.

It is looking to raise P1.189 trillion this year from local and foreign sources to fund its budget deficit, which is expected to widen to as much as 3.2% of gross domestic product. •