Philippine Treasury bond auction draws higher yields amid inflation pressure

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Philippine Treasury bond auction yields

Highlights

Bureau of the Treasury raises P25.831 billion from its dual-tenor bond auction, falling short of the P35-billion target despite P40.791 billion in tenders.
Seven-year bonds hit a 7.678% average yield, up 69 basis points from August and 130.3 basis points above their 6.375% coupon, reflecting rising inflation expectations.
Philippine inflation accelerates to 7.2% in September, prompting expectations for another Bangko Sentral ng Pilipinas rate hike at the Oct. 22 meeting.

Auction results and pricing pressure

As reported by BusinessWorld Online, the Bureau of the Treasury raises P25.831 billion from its dual-tenor Treasury bond offer, below its P35-billion target, although total tenders reach P40.791 billion.

For the reissued seven-year bonds, the Treasury raises P15.422 billion, short of the P20-billion plan, while bids amount to P25.292 billion. The issue, with a remaining life of three years and nine months, carries an average rate of 7.678%, with accepted yields ranging from 7.5% to 7.7%. The average yield is 69 basis points higher than the 6.988% fetched at the series' last award on Aug. 18 and 130.3 basis points above its 6.375% coupon.

The government also raises P9.959 billion from the reissued 25-year bonds, below the P10-billion offer, even as bids total P15.679 billion. The notes, which have a remaining life of 23 years and three months, are awarded at an average rate of 8.002%, with accepted tenders ranging from 7.95% to 8.1%. That is 60.2 basis points above the 7.4% seen at the series' last award on March 24 and 162.7 basis points above the 6.375% coupon.

Inflation outlook weighs on demand

Market appetite remains restrained as investors stay hesitant to lock in funds in longer-dated instruments while global and domestic inflation risks persist. Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort says higher crude oil prices linked to the widening Middle East conflict, together with a weak peso, minimum wage hikes and a strong El Niño until early next year, could add to price pressures and lead to further monetary tightening.

A trader also says demand is weak as the market grows more cautious over rising yields. Globally, bond markets remain under pressure from elevated energy prices and concerns over expanding government debt, even as the U.S. benchmark 10-year yield eases 5 basis points to 5.193%, according to Reuters. Traders are awaiting U.S. inflation data for signals on the Federal Reserve's next move, with the CME FedWatch tool showing an 80.6% chance that the Fed holds rates steady later this month.

In the Philippines, inflation accelerates to 7.2% in September from 6.1% in August and 1.7% a year earlier, marking the seventh straight month above the central bank's target. Analysts now expect the Bangko Sentral ng Pilipinas to deliver a fourth consecutive rate increase at its Oct. 22 meeting, while the Treasury continues its broader domestic borrowing plan of P418 billion for the month to help fund the government's budget deficit.

Our earlier article on U.S. Treasury yield moves highlighted how easing energy prices helped pull yields lower, while markets stayed focused on incoming U.S. inflation data for clues on the Federal Reserve’s next policy steps. We also noted that shifting expectations for rates and inflation can quickly change investor appetite and pricing across maturities, influencing bidding behavior in bond markets.

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