Higher returns observed for government securities

MANILA, Philippines — The Treasury Office may have to reject bids at next week’s government securities auction as investors are likely to demand higher rates following the central bank’s aggressive move.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said the government would face high rate demand from investors next week.

The Treasury is expected to raise 15 billion pesos in short-term treasury bills on Monday and 35 billion pesos in 10-year treasury bills on Tuesday.

“Local short-term interest would certainly rise to reflect the surprise rate hike of 75 basis points to 3.25% with immediate effect, given that they are all still well below inflation, given the steep local yield curve where long-term bond yields have been elevated to pre-pandemic levels recently,” Ricafort said in a Viber post.

The Bangko Sentral ng Pilipinas surprised the market with an increase of 75 basis points after consecutive increases in May and June.

The policy rate is now back to its March 2020 level. The Monetary Board is already expected to proceed with another 50 basis point rate hike by August 18.

The higher local policy rate is already expected to increase financing and borrowing costs for the government, as well as households, businesses and other institutions.

The Treasury may choose not to award Treasury bills and Treasury bonds next week.

“It is possible. The Treasury can always choose to reject abnormally high bid yields, or can allow a gradual increase in auction yields to reflect the latest realities on policy rates and inflation,” Ricafort said.

Nonetheless, Ricafort said the government may still be able to increase its planned borrowing program by 200 billion pesos for the month.

“Short-term policy rates have been well below the rate of inflation for some time now, so short-term interest rates have remained relatively lower in past business cycles relative to inflation,” did he declare.

Last Monday, the Treasury only granted a portion of 13.16 billion pesos out of the 15 billion pesos of treasury bills on offer, as investors demanded higher yields.

Rates on 91-day Treasury bills rose 2.4 basis points to 1.876% while yields on 182-day short-term debt securities rose 51 basis points to 2.907%.

Bids for the 364 days averaged 2.981%, up 28.8 basis points. It even peaked at 3.143%.

On the other hand, the Treasury fully allocated 35 billion pesos of Treasury bonds reissued to seven years, but with a higher average yield of 6.76%.

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