Bond investors stick to longer maturities

The Bureau of the Treasury was forced to fully release the 35 billion pesos in re-issued 7-year treasury bonds (T-bonds) at a higher rate on Tuesday as investors continued to take risks and bet for longer terms amid a surge in consumer prices.

With a remaining maturity of 6 years and 6 months, the average reissued debt rate was 6.76%, which is above benchmark rates in the secondary market.

This is 27.8 basis points higher than the 7-year Bloomberg Valuation (BVAL) reference rate of 6482 percent.

Similarly, it was 17.6 basis points higher than the security’s BVAL rate of 6,584 percent.

However, the Treasury said the average yield on the bonds was below the original coupon rate of 6,875 percent set for the initial issue in January 2019.

However, the number of participants in the auction was more than doubled, and the total number of bids was 92 billion pesos.

Asked if the Bureau of the Treasury was prepared to accept higher returns than the new normal, National Treasurer Rosalia W. De Leon said: “Not good, but given current market conditions, [we] there needs to be a reasonable return to investors for the risks they take.”

The Treasury has recently given in to investors’ demand for higher yields amid expectations that the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve will raise interest rates more aggressively to curb inflation.

This year, the BSP raised interest rates by a total of 50 basis points – 25 basis points each at its policy meetings on May 19 and June 23. These increases brought the discount rate to 2.5 percent.

But the BSP does not appear to be complete yet, as Gov. Felipe M. Medalla previously said the BSP was ready for a more aggressive rate hike of another 50 basis points at its next policy meeting in August, noting that the central bank was “strongly committed to maintaining price stability.

The government’s economic team under the Marcos administration now expects inflation to remain “elevated” in the coming months as fuel and food prices rose as a result of the ongoing Russian-Ukrainian war and supply chain disruptions.

Last Friday, the Cabinet-level Development Budget Coordinating Committee revised its inflation forecast for this year upward to 4.5-5.5%, higher than the 3.7-4.7% forecast adopted by former President Duterte’s economic team. in May of this year.

This month, the government intends to borrow 200 billion pesos in the local debt market.

In a breakdown, the Bureau of the Treasury will auction next month 140 billion pesos in treasury bonds and another 60 billion pesos in treasury bills to raise the amount.

As of the end of May, the national government’s outstanding debt had fallen to 12.5 trillion pesos from a record high of 12.76 trillion pesos at the end of April due to the repayment of a 300 billion pesos short-term interest-free loan from BSP. .

Image credits: Walter Eric See | dreamtime.com