Philippines Treasury bond auction yields rise as government makes partial award

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Philippines Treasury bond yields rise

Highlights

The Bureau of the Treasury awarded only P21.378 billion of reissued 20-year bonds at an average yield of 7.83%, up 39.2 basis points from September's 7.438%.
Investor caution driven by inflation risks, weak peso, high oil prices, and El Niño expectations pushed yields above secondary benchmarks and contributed to partial award.
Market participants anticipate the Bangko Sentral ng Pilipinas raising policy rates by 25 basis points on Thursday to 5.25%, influencing bond demand and pricing.

Treasury sale reflects tighter rate outlook

As reported by BusinessWorld Online, the Bureau of the Treasury borrowed only P21.378 billion from its auction of reissued 20-year Treasury bonds on Tuesday, below the P30-billion target, after tenders reached P27.578 billion.

The bonds, which carry a remaining life of four years and nine months, were awarded at an average rate of 7.83%, with accepted bids ranging from 7.7% to 7.87%. The average yield is 39.2 basis points higher than the 7.438% fetched at the series' previous award on Sept. 22, although it remains 17 basis points below the issue's 8% coupon rate.

The auction result also stands above secondary market benchmarks. Based on PHL Bloomberg Valuation Service Reference Rates data provided by the Bureau of the Treasury, the awarded rate is 12.3 basis points higher than the 7.707% fetched for the same series and 15.2 basis points above the 7.678% quoted for five-year debt, the closest benchmark tenor to the bonds' remaining life.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort says investors remain hesitant to lock in funds in longer-dated debt because of elevated inflation risks tied to the ongoing Middle East conflict, high global oil prices, a weak peso and the expected effects of a strong El Niño event on consumer costs. He adds that these pressures could lead to further monetary tightening at home and abroad, lifting borrowing costs further.

Policy expectations and liquidity shape demand

A trader says the auction yields are within market expectations as market participants stay on the sidelines ahead of the Bangko Sentral ng Pilipinas policy meeting on Thursday. A BusinessWorld poll shows 20 of 22 analysts expect the Monetary Board to raise benchmark rates by 25 basis points for a fourth straight meeting, which would bring the policy rate to 5.25%.

Two other analysts are pricing in a 50-basis-point increase, arguing that a bigger move could keep the BSP from falling behind the curve. Since April, the central bank has already raised key borrowing costs by a cumulative 75 basis points.

In the U.S., Fed funds futures traders are pricing in steady rates at the Federal Reserve's Oct. 27-28 meeting and a 91% chance of a rate hike in December, Reuters reports. Recent remarks from Fed officials, including Chairman Kevin Warsh, suggest policymakers are not rushing to raise rates again, even as U.S. crude rises 0.18% to $103.85 a barrel and Brent edges up 0.08% to $109.64 per barrel.

Ricafort says weak demand for the bond offer also contributes to the higher awarded rate, as elevated bid yields lead to a partial award. He adds that market liquidity may have been diverted by the government's recent retail Treasury bond offering and by the initial public offering of Mynt, Inc., parent of GCash, which debuts on the stock market on Tuesday.

The Bureau of the Treasury aims to raise P418 billion from the domestic market this month, consisting of P168 billion in Treasury bills and P250 billion in Treasury bonds. The government taps local and foreign funding sources to help finance its budget deficit, which is capped at P1.659 trillion, or 5.4% of gross domestic product, this year.

Our earlier report on UBS Global Wealth Management’s outlook highlighted how persistent inflation pressures could keep the Federal Reserve on a longer tightening path, with additional rate hikes still on the table beyond the near term. We noted that markets were increasingly pricing in further Fed increases after stronger inflation data, reinforcing expectations for elevated borrowing costs and tighter financial conditions—an important backdrop for current moves in government bond yields and auction demand.

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