Treasury bonds to fetch higher yields on Fed rate hike decision

By Janine Marie D. Soliman
Posted on March 20, 2017
http://www.bworldonline.com/content.php?section=Finance&title=Treasury-bonds-to-fetch-higher-yields-on-Fed-rate-hike-decision&id=142400

The government plans to raise as much as P15 billion in tomorrow’s auction of reissued five-year T-bonds with a remaining life of four years and 10 months. These were originally issued last Jan. 26 with a coupon rate of 4%.

Bond traders over the weekend that banks may request for higher returns for the T-bonds on offer compared to previous auctions, but with demand still remaining strong.

“For the auction [this week,] indications are at 10 to 15 basis points (bps) higher as markets adjust to a higher interest rate environment,” one trader said.

“We have seen the Fed hike [last] week as well as the central bank of China so that puts pressure on local yields as well,” the trader added.

Aligned with market expectations, the US central bank, at the close of its two-day Federal Open Market Committee (FOMC) meeting last week, announced it hiked policy rates by 25 basis points (bps) to 0.75-1% for the second time in three months, backed by solid US job gains and after authorities remain bullish that inflation will hit their 2% target for 2017.

On a similar note, the other trader said: “I would say rates would be higher as compared to the last auction, roughly 10 bps higher from the previous.”

The trader was referring to the Feb. 22 auction of reissued five-year T-bonds, where the Bureau of the Treasury raised P15 billion as planned in fresh funds from securities with a remaining life of four years and 11 months. The debt papers fetched an average rate of 4.03% and banks wanted to buy as much as P38.994 billion from the T-bonds on offer.

At the fixed-income market on Friday afternoon, the five-year debt papers were last quoted at 4.05%.

“The market’s current fear right now is the Fed since they’re now thinking when the next interest rate hike would be because the outlook is that rates would go up,” the trader said.

Meanwhile, asked what on what other factors the market will consider prior to placing their bids tomorrow, the other trader said, “There’s always been that domestic inflation direction and fiscal and economic plans of this administration, although markets are now focused on recent developments from the Fed.”

The Bangko Sentral ng Pilipinas adjusted its inflation projections for 2017 and 2018 to 3.5% from 3.3% and 3.1% from 3%, respectively.

Asked if the government would partially or fully award the T-bonds tomorrow, the first trader said, “Yields are still close to secondary market levels and actually it’s a good opportunity for the Treasury to award since we’re looking at comparable US Treasury rates which have responded positively despite the Fed rate hike.”

“The Bureau of the Treasury might as well load up now while the market is still calm,” the second trader added.

For his part, BDO Unibank, Inc.’s Jonathan L. Ravelas said in his weekly outlook: “Short-term and long-term rates moved sideways to up [last week…]. Continue to see rates to move sideways to up [this week.]”