Five-year T-bonds may rise

BY GERARD S. DELA PEÑA/BUSINESSWORLD THE RATE OF FIVE-YEAR TREASURY BONDS is expected to rise at tomorrow’s auction, but the potential increase is considered an improvement from rates in secondary markets, a government securities trader said. The government will auction off P7 billion worth of reissued five-year T-bonds, which are expected to fetch a rate of 6.625% to 6.75%. This is 65.8 basis points (bps) to 78.3 bps higher than the 5.967% that it fetched on May 29. Interest rates have gone up by around 100 bps due to problems in the US housing loan mortgage market. The projected range, however, is still lower than the 7% that the five-year debt paper fetched in the secondary market last week. "This is actually good news for the government because it can lessen its borrowing costs. The decline is the effect of easing subprime concerns and peaceful reactions to the verdict [on former President Joseph Estrada]," the trader said. Antonio Espedido, China Banking Corp. treasurer, expects the rate to decline by 5 bps from 7% in the secondary market given the system’s high liquidity. "I think the yield will be slightly downward. In the past days, the market has been flushed with liquidity," he said. Analysts said the US Federal Reserve is unlikely to cut its key policy rate in the apparent absence of threat to the US economy. Investors remain cautious as they await the release of US housing data, which will give clues on the effects of the subprime mortgage troubles on the US economy. But while the Philippine central bank is not forced to cut its own rates in reaction to the Fed’s possible rate cut given the country’s economic fundamentals, T-bond rates will have to be aligned with those of regional markets, Mr. Espedido said. The T-bonds may be awarded in full this time as the government receives competitive bids and brisk demand. The five-year T-bond is a highly tradable security. "The market is expected to be aggressive. The five-year T-bond is very tradable. The market may be very much interested," the trader said. Meanwhile, the peso is expected to trade between P46.20 and P46.50 this week. The local currency, however, is still sensitive to movements in regional markets, and a slowdown in US stocks could weaken it, a currency trader said. "US subprime concerns are not yet totally over. The peso’s performance will still depend on the movement of US stocks," the trader said. On Friday, the peso closed at P46.30 per dollar, 17 centavos stronger than Thursday’s P46.47 finish. Traders traced the peso’s rally to the dollar’s general weakness, with investors taking short positions on the greenback in anticipation of the Fed’s rate cut tomorrow. The government had been rejecting bids in previous Treaury bill and T-bond auctions due to the premium that banks have been asking, which showed that the government is awash with cash. Last month, the government awarded only P3.63 billion worth of 10-year T-bonds, while it rejected all the bids for the one-year T-bills. On Sept. 4, the government awarded the 20-year debt paper only in part despite strong demand from investors. The 20-year Treasury bond was nearly twice oversubscribed, with total tenders reaching P13.347 billion against a P7-billion offer.