Bond yields seen rising ahead of anticipated BSP rate hike

MANILA, Philippines — Treasury yields for 10-year bonds may spiral to as much as 7.4 percent this week, as investors anticipate the Bangko Sentral ng Pilipinas (BSP) to deliver an aggressive 50 basis points hike.

A bond trader told The STAR that the Bureau of the Treasury could be faced with the dilemma of whether to award in full its upcoming offer of 10-year securities.

As of Friday, the market pricing for 10-year bonds stands at 6.982 percent, but bids may exceed by nearly 40 bps due to the threat of an aggressive rate hike.

“For T-bills (Treasury bills), we expect rates to go up between five and 10 bps across the board. On the other hand, the T-bonds (Treasury bonds) to be auctioned may fetch yields from a range of 7.125 percent to 7.375 percent,” the trader said.

The trader anticipates investors to insist on additional yields to protect their capital from the risks of inflationary surge and its consequential rate hikes. Likewise, the debt market is starting to be convinced that the BSP and the US Federal Reserve would go hard with their next rounds of tightening.

Last week, the Fed has raised its interest rate by 75 bps, above the market consensus 50 bps and the biggest jump since 1994, as it struggles to tame US inflation due to price spikes in food and fuel.

“With the 75 bps hike from the Fed, we expect investors to stay cautious – even defensive – with their asset purchases due to heightened risks arising from monetary tightening,” the trader said.

Incoming BSP Governor Felipe Medalla earlier hinted that the central bank’s Monetary Board may stick with its initial plan of increasing by 25 bps, turning down the market suggestion of a 50 bps hike in response to the Fed’s action.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said the BSP may have to lift its benchmark rate by 50 bps in its upcoming meeting on June 23 to keep a comfortable differential between interest rates here and in the US.

Ayala-led Bank of the Philippine Islands said inflation may worsen in a scenario wherein the gap between Philippine and US rates is minimized, if not leveled.

According to the bank, the economy has become sensitive to exchange rate movements, as the government fills in supply shortages by bringing in imports like fuel, pork and rice.

After the 75 bps hike of the Fed, the difference between local and US rates sits at 50 bps, with the BSP’s at 2.25 percent and the US Fed’s at 1.75 percent.

The Treasury on Monday will sell P15 billion in T-bills at P5 billion each for 91-day, 182-day and 364-day tenors and on Tuesday will offer P35 billion in T-bonds with a 10-year maturity.