Gov’t told to sell retail bonds early

MANILA, Philippines - With double-digit inflation expected to persist up to the end of this year, the government should not dawdle over the issuance of new retail Treasury bonds (RTBs) or it risks borrowing at a much higher cost. Market sentiment for an RTB offer this early is optimistic as soaring inflation has prompted a shift to shorter-term debt papers from longer-tenored ones. The bonds cater mainly to small investors, as they can be sold for as low as P5,000 each. Debt instruments of this type were last offered in August 2007, when the government raised P77.65 billion. Last week, the Bureau of the Treasury said it has solicited proposals from the banking industry for the timing, tenor and size of the RTB float. The move came after it retired some P34 billion worth of RTBs early in the month. "They should go ahead with the offer. The rates will get more expensive with rising inflation," Rizal Commercial Banking Corp. vice president Marcelo E. Ayes said. "It makes sense to borrow now because there is threat that rates would further go up," a bond dealer from a local bank said. Interest rates are expected to keep pace with heating inflation, which hit a 14-year peak of 11.4% last month. The central bank has said inflation would peak in the third quarter before it slows to single-digit levels next year. Inflation this year should average between 7 and 9%, higher than its target. Double-digit inflation figure is widely expected to push the central bank into further tightening monetary policy, making borrowing more expensive for the government. Bond dealers said RTBs with two-to-three year tenors should be attractive as risk-averse investors shy away from longer-dated investments. "The demand is on the shorter end, shorter than five years, because the auction schedule for the third quarter has already been largely concentrated on five- and seven-year bonds," a bond trader said. "There would be an ample supply for Treasury bills and long-dated papers so the two-to-three year papers should be attractive," another trader said. The bonds would also offer a vehicle for investors who have lost appetite for stocks, bankers said. The government could easily raise as much as P50 billion from an RTB issue this early, a front-loading of sorts, and enough for it to forego borrowing in the fourth quarter, when rates are expected to be higher. "It’s going to be successful if done this early. The earlier to cover their borrowing requirements, the better," a trader said. The government has scrapped a plan to balance its budget this year as it spends more to spur growth amid a slowing economy. It now expects to post a budget deficit of as much as P75 billion this year, part of which may be funded by additional borrowings from local and overseas debt markets. The government has said it may raise as much as $750 million in an additional sovereign debt offer possibly in the fourth quarter after a $500 million issue in January. In May, the government posted a budget surplus of P7 billion, a record for the month, bringing its deficit in the first five months to P18.8 billion, less than half the P41.8 billion a year earlier. - BusinessWorld