Treasury bonds likely to fetch higher yields

By Beatrice M. Laforga

YIELDS from three-year Treasury bonds (T-bonds) on offer on Tuesday will likely increase on the back of recent cuts by the central bank on banks’ reserve requirement ratio (RRR) as well as its benchmark interest rate.

The Bureau of the Treasury (BTr) plans to raise P20 billion via reissued bonds with a remaining life of two years and nine months, carrying a coupon rate of 4.75%.

The government raised P20 billion out of the total bids worth P56.6 billion via its offering of reissued three-year notes. The papers fetched an average rate of 3.961% when it was last offered on Aug 27., 84.2 basis points (bps) lower than the 4.803% quoted when the bonds were first offered on July 2.

A bond trader expects the average rate to fall between the 4-4.2% range while Robinsons Bank Corp. peso debt trader Kevin S. Palma said he sees it hovering around 4.000% — 4.125%.

Mr. Palma said there will be a strong interest on the three-year papers following the Bangko Sentral ng Pilipinas’ (BSP) announcement on Friday that there will be a 100-bp cut on banks’ RRR effective on the first reserve week of November.

“Three-year paper up for issuance could possibly be slightly higher from the previous auction. Strong interest for the said paper will persist after the BSP announced a cut in banks’ reserve requirements by 100bps effective November,” Mr. Palma said in a phone message on Sunday.

The first trader also said the market price will likely price in BSP’s move to slash its policy rates last Thursday.

“Slightly higher lang dun sa secondary kasi market will price in the recent cut in its policy rate and if ever kung mag-cut ng RRR, i-price in din ‘yun,” the trader said in a telephone interview.

At the secondary market on Friday, the three-year bonds were quoted at 4.210% based on the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

After a late Friday meeting, BSP’s Monetary Board (MB) announced that it will slash banks’ RRR by 100 bps starting the first reserve week of November, bringing the reserve requirement for universal and commercial banks to 15% from 16%, thrift banks to five percent from the current six percent, and three percent from four percent for rural and cooperative banks.

This was just a day after the MB slashed its benchmark interest rate by 25 bps during its policy-setting meeting, reducing the rates for overnight reverse repurchase, overnight deposit and lending to four percent, 3.5% and 4.5%, respectively.

Meanwhile, the policy rate cut was the third time this year amid continued easing inflation and the need to spur economic growth, against the cumulative 175-bp hike on interest rates implemented last year to temper the inflation crisis in 2018.

Economists estimate that the one-percentage point reduction in banks’ RRR will release around P100 billion of additional liquidity into the financial system.

“Besides, the 3-year tenor has always been a sweet spot for investors,” Mr. Palma added.

The government plans to borrow P220 billion from the local market in the fourth quarter via a mix of T-bonds and Treasury bills.

It is looking to raise P1.189 trillion this year from local and foreign sources to fund its budget deficit, which is expected to widen to as much as 3.2% of gross domestic product.