Upward pressure on government securities seen as BSP interest rate hike looms

MANILA, Philippines — The government will find itself in a tight spot borrowing from the debt market this week, as yields for seven-year securities could breach six percent due to monetary tightening.

A bond trader told The STAR that rates for Treasury bills (T-bills) could increase from a low of 15 basis points to a high of 20 bps across the board.

Further, the trader said yields for the seven-year Treasury bonds (T-bonds) could land anywhere between 6.25 percent and 6.5 percent, a range that the Bureau of the Treasury may find difficult to award depending on the spread of the bids.

“A week ago we saw that yields for the seven-year tenor lingered below six percent. As the days went by, we saw rates go up to the six percent territory of the 10-year tenor,” the trader said.

According to the trader, investors started to price in the risks that accompany a rate hike by the Bangko Sentral ng Pilipinas (BSP).

Investors are anticipating the BSP to hike interest rates on May 19, even as BSP Governor Benjamin Diokno committed to take such action only in June.

Economists project that the BSP may turn its back from its June promise after the economy, as measured by the gross domestic product (GDP), expanded by 8.3 percent in the first quarter.

ING Bank Manila senior economist Nicholas Mapa said the GDP growth in the first quarter gave the BSP the space to carry out its policy normalization similar to what central banks abroad are pursuing.

Mapa added the inflation surge in the past months – from three percent in January and February to four percent in March and 4.9 percent in April – requires the BSP to tighten monetary cycle.

“A robust recovery and above target inflation – policy normalization. Now fully expecting the BSP to hike rates at May 19 meeting,” Mapa said.

On the other hand, the trader warned that investor demand for government bonds could decline if the peso weakens any further against the US dollar this week.

Likewise, investors may stay away from the debt market depending on what the BSP signals prior to its rate-setting meeting scheduled on Thursday.

The Treasury on Monday will auction P15 billion in T-bills divided into P5 billion each with tenors of 91 days, 182 days and 364 days.

It will also offer an original issue of seven-year T-bonds worth P35 billion on Tuesday.