Philippine Treasury partially awards bond sale as inflation fears lift yields

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Philippine Treasury bond sale

Highlights

Philippine Bureau of the Treasury raises P21.775 billion from dual-tranche bond auction, below the P35-billion target, as average yields rise sharply amid inflation concerns.
Reissued seven-year bonds fetch an average rate of 7.737%, up 91.2 basis points from August, and 10-year bonds average 8.189%, up 66.4 basis points from September.
September headline inflation accelerates to 7.2%, peso falls to a record low of P64.17 against the dollar, and BSP signals possible further tightening after the recent 50 basis-point hike.

Bond auction draws higher yields

As reported by BusinessWorld Online, the Bureau of the Treasury raises P21.775 billion from its dual-tranche Treasury bond offer on Tuesday, below its P35-billion target, as borrowing costs climb amid worries over inflation pressures linked to the continuing Middle East crisis.

For the reissued seven-year bonds, the government borrows P15.539 billion, short of the P25-billion plan, while tenders reach P22.147 billion. The bonds, with a remaining life of two years and 11 months, fetch an average rate of 7.737%, with accepted yields ranging from 7.5% to 7.78%.

That average rate is 91.2 basis points higher than the 6.825% recorded at the series' last award on Aug. 25, and 73.7 basis points above its 7% coupon. It is also above comparable secondary-market benchmarks, including the 7.623% level for the same series and the 7.479% quote for the three-year bond, the closest benchmark tenor based on PHP Bloomberg Valuation Service reference rates provided by the Treasury.

For the reissued 10-year bonds, the Treasury raises P6.416 billion, below its P10-billion program, although bids reach P12.922 billion. The notes, which have a remaining life of nine years and three months, are awarded at an average rate of 8.189%, with accepted yields between 8.035% and 8.3%.

The 10-year average yield is 66.4 basis points above the 7.525% seen at the series' last award on Sept. 15 and 226.4 basis points higher than its 5.925% coupon. The partial awards bring the outstanding volume of the seven-year and 10-year issues to P321.5 billion and P355.8 billion, respectively, according to the Bureau of the Treasury.

Inflation risks keep investors cautious

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort says both tenors are only partially awarded because the issues fetch high bid yields, with the Middle East conflict and the related oil price shock making investors wary of longer-dated debt. He adds that the peso's slide, wage hikes, second-round price effects and strong El Niño conditions could further stoke inflation and potentially push the Bangko Sentral ng Pilipinas toward additional rate increases, especially if the U.S. Federal Reserve resumes tightening.

The BSP raises benchmark interest rates by 50 basis points at its Oct. 22 meeting and signals that further tightening remains possible. The central bank still expects inflation to average 6.1% for this year, while lifting its forecast for 2027 to 6% from 5.4% and keeping its 2028 estimate at 3.3%.

September headline inflation accelerates to 7.2% from 6.1% in August and 1.7% a year earlier, marking the seventh straight month above the BSP's 3% target. At the same time, the peso falls to a fresh record low of P64.17 against the dollar on Tuesday, after touching an intraday trough of P64.20, extending a seven-session run of all-time low closes.

A trader says the partial award also reflects weak demand and subdued market activity, with investors waiting for more data later in the week. The Bureau of the Treasury plans to raise P418 billion from the domestic market this month, including P168 billion through Treasury bills and P250 billion through Treasury bonds, as the government funds a budget deficit capped at P1.659 trillion, or 5.4% of gross domestic product, this year.

In our earlier coverage of S&P Global Ratings’ warning on sovereign borrowing risks, we explained how persistent geopolitical tensions and elevated fiscal spending can keep funding costs high and squeeze governments as debt rolls over at higher rates. The piece also noted that shocks linked to the Russia-Ukraine conflict and the war in the Middle East can lift energy and food prices, worsen inflation, and deepen vulnerabilities for emerging markets with heavier interest burdens and narrower revenue bases.

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