T-bonds fully awarded as yields climb on inflation surge, Iran war

THE GOVERNMENT fully awarded Treasury bonds (T-bonds) on Tuesday despite subdued demand, as investors priced in higher inflation expectations linked to global oil risks stemming from the Iran war and stalled US-Iran negotiations.

The Bureau of the Treasury (BTr) raised P30 billion as planned through reissued seven-year bonds, even though total bids reached only P38.444 billion.

The bonds, which have a remaining life of four years and eight months, were awarded at an average yield of 7.249%. Accepted bids ranged from 7% to 7.45%.

The average yield jumped 153.2 basis points from the last auction in March, when the same series was awarded at 5.717%. It was also higher than the 6.125% coupon rate and above secondary market levels before Tuesday’s auction.

Market participants said investors remained cautious amid expectations that borrowing costs could stay elevated.

A trader noted weak demand in government securities, and said yields might continue to rise at  upcoming auctions unless there is a clear improvement in global risk conditions.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said inflation expectations were affected by uncertainty in global oil supply, particularly risks tied to the Iran war and disruptions in key shipping routes such as the Strait of Hormuz.

Domestic inflation has also surged sharply. Data from the Philippine Statistics Authority showed headline inflation hit 7.2% in April, the highest in more than three years and well above the 2%-4% target. It was also higher than market forecasts and the central bank’s projections.

This marked the second straight month above target, pushing year-to-date inflation to 3.9%, near the upper end of the BSP’s full-year goal.

The trader said government securities repriced higher following weak demand in a previous five-year bond auction, reflecting investor caution and expectations that yields are still adjusting to inflation risks.

“We don’t see any catalyst for a rally in the short term unless the war ends,” the trader said in an e-mailed reply to questions. “We view the weekly auctions to be the main catalyst in government securities that will push yields higher in the coming weeks.”

The Treasury said the outstanding volume of the reissued bond series now stands at P245 billion.

For May, the government aims to raise P268 billion from the domestic market, consisting of P128 billion in Treasury bills and P140 billion in T-bonds.

The borrowing plan supports financing for a budget deficit capped at P1.61 trillion, or 5.3% of economic output this year, with funding from both domestic and external markets. — Aaron Michael C. Sy