TREASURY BONDS (T-bonds) on offer tomorrow are seen to fetch higher yields to track the rates of US Treasuries and after the Bangko Sentral ng Pilipinas (BSP) adjusted its inflation forecast.
The Bureau of the Treasury (BTr) plans to raise as much as P20 billion at Tuesday’s auction of fresh 20-year T-bonds set to mature on Feb. 22, 2038.
A bond trader said in a phone interview that banks will likely request for higher returns from the government amid higher US Treasury rates.
“I expect yields to go higher because US Treasuries moved higher as well. It will be 20 basis points higher, 6.6-6.8%,” the trader said.
During Friday’s morning session, US benchmark 10-year Treasury notes jumped to 2.884% from 2.8804% following upbeat US housing and import prices data.
Housing starts, or new homes to be constructed, rose by 9.7% to a seasonally adjusted annual rate of 1.326 million units last month. The January figure was the highest level since October 2016.
US import prices also grew 1% in January, boosting expectations of a rate hike from the Federal Reserve.
Meanwhile, another trader said through text message: “I’m hearing from 6.5-6.75% range. I doubt BTr will issue at those levels. They will look desperate if they do,” adding that the Treasury may consider awarding at a coupon rate of 6.25% should there be enough volume.
At the secondary market on Friday, the 20-year Treasury bonds fetched a rate of 6.4568%.
Meanwhile, at the government’s last auction of 20-year papers last July 25, 2017, it rejected all bids for the reissued bonds with a remaining life of 19 years and 10 months.
Had the government accepted the bids at that auction, it would have accepted an average rate of 5.244%, 20.9 basis points higher from the 5.0356% rate seen in the previous auction. The T-bonds on offer then were also undersubscribed, attracting only P11.202 billion in tenders versus the government’s P15-billion offer.
On the demand side, the trader expects that there will be less demand for the T-bonds auction tomorrow after the BSP revised its inflation forecast for the next two years.
“I guess there’s not much demand for long-end bonds [at the moment, especially] with the recent re-evaluation of inflation expectations,” the trader added.
The Bangko Sentral ng Pilipinas raised its inflation outlook for 2018 to 4.3% from 3.4% — above the 2-4% target. It likewise hiked the 2019 forecast to 3.5% from 3.2%.
The trader said the revised inflation outlook “points to possible more rate hikes than initially thought.”
The Treasury said it plans to auction off P120 billion worth of Treasury bills and another P120 billion worth of Treasury bonds in the January to March period.
The total amount the government intends to borrow from the local market is higher than the P200 billion it offered in the last quarter of 2017.
The government borrows from local and foreign sources to fund its budget deficit, which for this year is capped at 3% of the country’s gross domestic product.
The government targets a P888.23 billion gross borrowing plan this year. — K.A.N. Vidal