Spooked debt market raises lending costs

MANILA, Philippines — The debt market, spooked by election tensions, rate hikes and inflationary pressures, has raised its lending costs across benchmark tenors.

As of yesterday afternoon, Treasury yields for five-year bonds ballooned by 23.3 basis points to 5.75 percent, while that for the 10-year securities went up by 29.6 basis points to 6.4 percent, according to a bond trader.

“We saw that the market stayed quiet at the open of trading due to wariness on a mix of issues, including of course the results of the elections. Outside of the polls, investors are monitoring the rate hikes to be enforced here and abroad,” the trader said.

Further, Treasury yields for short-term debt papers have gone up across the board due to the threat of rising inflation in the coming months.

The Bureau of the Treasury yesterday awarded just P5 billion of the P15 billion in Treasury bills (T-bills) on offer, as investors defied latest developments by asking for additional returns.

The Treasury only afforded to award the P5 billion on board for 91-day T-bills, posting the lowest increase in yields of 25.9 basis points to 1.531 percent.

On the other hand, the Treasury rejected all bids for the 182-day and 364-day T-bills, or else it would be forced to borrow at rates above and beyond market pricing.

Against average prices, yields for the three-month program spiked by 54.1 basis points to 2.165 percent, while rates for the six-month tenor grew by 34.7 basis points to 2.329 percent.

Demand for T-bills reached only P19.984 billion, oversubscribing the offer by 1.33 times and falling from P23.731 billion last week.

National Treasurer Rosalia de Leon said investors priced in the market consensus that inflation would haunt not only the Duterte administration, but also its successor.

“The surge in April inflation continues to dampen, as analysts see inflation as a big headache for the next administration,” de Leon said in a text message to reporters.

As the costs of food, transport and utilities went up, inflation zoomed by 4.9 percent in April, the highest in 40 months, pressured by rising fuel prices due to Russia’s invasion of Ukraine.

In turn, inflation averaged 3.7 percent in the four months to April, nearing to hit the upper end of the government’s target of two percent to four percent.

The trader said the Treasury should anticipate investors to insist on increased yields in the next few weeks. First and foremost, the trader said the Bangko Sentral ng Pilipinas is set to increase policy rates in June to mirror similar actions taken by the US Fed.

The Fed has raised its benchmark rates by a total of 75 basis points as of May and plans to pursue 100 basis points more for the rest of the year. By jacking up interest rates, the Fed wants to push borrowing costs up to cut demand for inflationary drivers like properties and vehicles.

“Expect the coming weeks to be difficult for the Treasury to borrow from investors, especially as the central bank approaches its tightening period,” the trader said.

The government can no longer afford to borrow at increased rates after the national debt rose to a record P12.68 trillion as of March, based on records.

In turn, the Treasury has taken off the table any plans to issue offshore bonds for the remainder of President Duterte’s term to minimize the rise in public debt.