Gov’t fully awards 10-year bonds as yields drop

THE GOVERNMENT fully awarded the reissued bonds it auctioned off on Tuesday at a lower average rate as the US Federal Reserve is expected to start its long-awaited easing cycle this week.

The Bureau of the Treasury (BTr) raised P30 billion as planned via the reissued 10-year bonds on Tuesday as total bids reached P96.347 billion, or more than thrice the amount on offer.

This brought the outstanding volume for the series to P231.9 billion, the Treasury said in a statement.

The bonds, which have a remaining life of nine years and four months, were awarded at an average rate of 5.967%. Accepted yields were 5.95% to 5.974%.

The average rate of the reissued papers fell by 24.5 basis points (bps) from the 6.212% fetched for the bonds when they were last awarded on July 16. Still, this was 28.3 bps lower than the 6.25% coupon rate.

It was likewise 5.8 bps below the 6.025% quoted for the same bond series and 9.7 bps lower than the 6.064% fetched for the 10-year bond at the secondary market before Tuesday’s auction, based on PHP Bloomberg Valuation Service (BVAL) Reference Rates data provided by the BTr.

To accommodate the strong demand seen for Tuesday’s offer, the BTr opened its tap facility window to raise P5 billion more via the bonds at the same average rate.

The T-bonds auctioned off on Tuesday fetched lower rates to track the decline in the 10-year US Treasury yield amid expectations of a 50-bp rate cut by the Fed at its two-day meeting this week, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The awarded lower T-bond rate today reflected market anticipations of a potentially strong policy rate cut from the US Federal Reserve this week,” a trader likewise said in an e-mail on Tuesday.

“Demand was considerably strong as investors flocked to higher-yielding instruments before the start of the Fed rate cutting cycle later this week,” the trader added.

US Treasury yields came under pressure with just a day to go before the expected start of the Federal Reserve’s easing cycle that could see policy makers deliver an outsized rate cut, Reuters reported.

Markets are now pricing in a 67% chance that the Fed could ease rates by half a percentage point at the conclusion of its monetary policy meeting, after a slew of media reports revived the prospect of more aggressive easing.

The two-year US Treasury yield, which typically reflects near-term rate expectations, was last at 3.5547%, having fallen to a two-year low of 3.5280% in the previous session.

The benchmark 10-year yield was little changed at 3.6232%.

Futures on the fed funds rate, which measures the cost of unsecured overnight loans between banks, have priced in a nearly 60% chance of a 50-bp rate cut by the Federal Reserve on Wednesday, LSEG calculations showed.

That was up from 45% last Friday and from 25% following the release of an in-line US consumer price index report last week.

The Fed will hold a two-day policy meeting starting on Tuesday and is widely expected to reduce the benchmark overnight interest rate currently in the 5.25% to 5.5% range. The rate reduction, however, has turned into a coin flip between 50 and 25 bps over the last few days.

For 2024, rate futures have factored nearly 120 bps in easing, and about 250 bps in cuts by September of 2025.

Up until last Friday, the odds were pretty much tilted toward a 25-bp cut. But reports by the Wall Street Journal and Financial Times late Thursday saying a 50-bp rate reduction is still an option, and comments from former New York Fed President Bill Dudley arguing for an outsized cut, triggered a pivot in market expectations.

On Monday, Mr. Dudley reiterated his stance on the need for the Fed to do a big cut on Wednesday. In an opinion piece on Bloomberg News, the former Fed official noted that the Fed’s dual mandate of price stability and maximum sustainable employment has become more balanced, which suggests monetary policy should be neutral, neither restrictive nor boosting economic activity.

The BTr wants to raise P195 billion from the domestic market this month, or P80 billion through Treasury bills and P115 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