Gov’t rejects all bids in T-bond auction

THE GOVERNMENT rejected all bids for reissued 20-year Treasury bonds (T-bonds) it offered on Wednesday as the market demanded higher rates in anticipation of more rate hikes to combat inflationary pressures.

The Bureau of the Treasury  (BTr) did not accept any tenders for the reissued 20-year securities — which have a remaining life of 16 years and four months — it offered on Wednesday even as total bids reached P49.985 billion, higher than the programmed P35 billion.

Rates bid by participants ranged from 7.250% to 8%. Had the offer been fully awarded, the average rate for the bonds on offer would have reached 7.565%, 81.5 basis points (bps) higher than the 6.75% coupon and up 222.4 bps from the 5.341% average fetched for the series when it was first offered on Jan. 22, 2019.

This is also 22.7 bps above the 7.3380% quoted for the 20-year tenor at the secondary market before the auction, based on the PHP Bloomberg Valuation Reference Rates published on the Philippine Dealing System’s website.

Traders said that the market is demanding higher bids amid expectations of more monetary tightening from central banks.

“The bids submitted by the market are too high. That is consistent [with] the view that interest rates may continue to rise in the months ahead,” a trader said.

“Maybe they found the bids too high,” a second trader said, also attributing it to recent and expected policy hikes.

“They don’t want to look aggressive in borrowing as well if they did fully award,” the second trader added. “That will cause sell-off in secondary market or may cause investors to expect higher yields in next month’s auctions.”

Likewise, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that anticipation of more rate hikes is on expected efforts to help stabilize the weakening peso, as well as elevated inflation.

“Higher bid yields are also due to the aftermath of the storm damage by Super Typhoon Karding in Central and Northern Luzon, especially the provinces that are major producers of rice, corn, vegetables, and other food/agricultural products,” Mr. Ricafort said in a Viber message.

“This could lead to some pick up in overall inflation, and would support more local policy rate hikes to better manage both inflation and inflation expectations,” he added.

The consumer price index climbed to 6.3% year on year in August from the nearly four-year high of 6.4% a month earlier and 4.4% a year ago. It was the fifth straight month that inflation exceeded the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target this year.

In response, the BSP increased its benchmark interest rates by 50 bps to 4.25% last Thursday, hiking borrowing costs by 225 bps since May.

The US Federal Reserve hiked its policy rates by another 75 bps last week while signaling larger increases to come as inflation is still way above its 2% target at 8.3% as of August. The central bank has raised key rates by 300 bps since March, including two other 75-bp moves in June and July.

BSP Governor Felipe M. Medalla said last month that the Fed’s aggressive tightening also poses an additional risk to domestic prices due to its effect on the peso.

The peso closed at an all-time low of P58.99 per dollar on Tuesday, Bankers Association of the Philippines data showed. In the year to date ending Sept. 27, the peso has weakened by 15.66% or P7.99 from its P51-a-dollar close last year.

Wednesday’s T-bond auction was the last one for the month. The government raised just P70 billion via bonds against its P140-billion program for September after rejecting all bids in two auctions. However, it was able to raise P10 billion when it opened its tap facility on Sept. 13.

With Treasury bill (T-bill) awards in September only reaching P18.58 billion against the P60-billion program, the government was only able to raise P88.58 billion out of its P200-billion plan for the month.

For October, the BTr wants to raise P200 billion from the domestic market, or P60 billion via T-bills and P140 billion from T-bonds. It is set to offer longer bond tenors next month, with maturities ranging as high as 13 years.

The government borrows from local and external sources to help fund a budget deficit capped at P1.65 trillion this year, equivalent to 7.6% of gross domestic product. — Diego Gabriel C. Robles