THE GOVERNMENT made a full award of the reissued Treasury bonds (T-bonds) it offered on Tuesday at a lower average yield as soft US data boosted expectations of a US Federal Reserve rate cut soon.
The Bureau of the Treasury (BTr) raised P30 billion as planned via the reissued 20-year bonds it auctioned off on Tuesday as total bids reached P57.087 billion, higher than the amount on the auction block.
The bonds, which have a remaining life of seven years and one month, were awarded at an average rate of 6.624%. Accepted yields were 6.515% to 6.649%.
The average rate of the reissued bonds went down by 43.4 basis points (bps) from the 7.058% fetched for the series’ last award on April 30. This was also 137.6 bps below the 8% coupon for the issue.
Still, this was 0.8 bp higher than 6.616% quoted for the seven-year bond, but 2 bps below 6.644% seen for the same bond series at the secondary market before Tuesday’s auction, based on PHP Bloomberg Valuation Service Reference Rates data provided by the Treasury.
Tuesday’s full award brought the outstanding volume for the series to P313.3 billion, the BTr said in a statement.
“The lower T-bond rate reflected the softer-than-expected US Institute for Supply Management (ISM) manufacturing purchasing managers’ index report for May 2024. This report has trimmed some hawkish expectations of a prolonged delay in US policy rate cuts,” a trader said in an e-mail.
US manufacturing activity slowed for a second straight month in May as new goods orders dropped by the most in nearly two years, and spending on construction projects slipped unexpectedly the month before, the latest indications that a gradual slowdown in the economy is taking hold, Reuters reported.
The ISM’s manufacturing purchasing managers index for May fell to 48.7 from 49.2 in April, the research group said on Monday, noting an increase in references to “softening” among survey respondents. It was both the second straight decline and the second month below the 50 level that separates growth from contraction. Economists polled by Reuters had a median estimate for 49.6.
Meanwhile, construction spending fell unexpectedly for a second month in April on declines in non-residential activity, although there was an improvement in single-family home building.
The softer tone of the recent data has begun to buttress the case in investors’ minds for the Fed to start lowering interest rates about three months from now. Following the ISM data, interest rate futures pointed to about a 60% probability that the Fed will lower its benchmark rate in September from the current 5.25-to-5.5% range it has been held at since last July.
Fed officials, who next meet on June 11-12, have said their primary focus is on returning inflation to their 2% target after price pressures reaccelerated in the first quarter.
The T-bonds fetched a lower average rate after the Bangko Sentral ng Pilipinas (BSP) chief said they could cut rates earlier than the Fed, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.
BSP Governor Eli M. Remolona, Jr. on Tuesday reiterated that the benchmark rate could be cut ahead of the Federal Reserve, keeping pressure on the peso against the dollar amid expectations US rates will stay higher for longer, Reuters reported.
Mr. Remolona said the BSP is ready to take action when the peso is under stress, but added that the central bank does not intervene in the foreign exchange market on a daily basis.
The central bank chief said the benchmark policy rate — currently sitting at a 17-year high of 6.5% — could be cut before the Fed starts its easing cycle, repeating previous comments as policy makers gain more confidence about reining in inflation pressure.
Mr. Remolona said the BSP is already less hawkish than before as inflation could settle within its 2-4% comfort range sometime this year after staying above the top end of that target for two consecutive years.
The BSP raised borrowing costs by a cumulative 450 bps from May 2022 to October 2023 to rein in inflation.
The BTr wants to raise P180 billion from the domestic market this month, or P60 billion from Treasury bills and P120 billion via T-bonds.
The government borrows from local and foreign sources to help fund its budget deficit, which is capped at P1.48 trillion or 5.6% of gross domestic product for this year. — A.M.C. Sy with Reuters
