Rates on the Treasury bills (T-bills) and Treasury bonds (T-bonds) to be offered by the Philippine government this week could settle higher, as renewed tensions in the Middle East reinforce expectations of elevated near-term inflation.

This Week's Auctions

The Bureau of the Treasury (BTr) will auction off P45 billion in T-bills on Monday: P25 billion in 91-day papers, P15 billion in 182-day securities, and P10 billion in 364-day debt.

On Tuesday, the government is looking to raise P35 billion through a dual-tenor T-bond auction, consisting of P25 billion via reissued seven-year debt with a remaining life of three years and nine months, and P10 billion through 25-year notes with a remaining life of 23 years and three months.

T-bills are short-term government debt that matures in one year or less, while T-bonds are longer-dated instruments that lock in funding over multi-year periods.

Analyst Expectations

T-bill and T-bond yields could track the week-on-week increase seen in secondary market rates after fresh attacks in the Middle East, which add to inflation concerns already heightened by the faster-than-expected September Philippine consumer price index data, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

This could bolster expectations of further monetary policy tightening, he said.

"Headlines regarding Saudi Arabia will definitely test BTr in the upcoming auctions this week," the first trader said in a text message.

The second trader said in an e-mail that the reissued seven-year and 25-year securities could fetch average rates of 7.5%–7.6% and 8.1%–8.2%, respectively.

However, the BTr may have room to reject offers this week if rates climb too high, "as we sense that they are now ahead of their borrowing schedule," following the P168 billion in new money it raised from its latest retail Treasury bond (RTB) offer, the second trader added.

Secondary Market

At the secondary market on Friday, yields on the 91-, 182-, and 364-day tenors rose by 24.03 basis points (bps), 26.72 bps, and 5.11 bps week on week to close at 5.7615%, 6.092%, and 6.2081%, according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System website. As benchmark reference rates, these secondary market yields serve as a pricing guide for participants bidding at the BTr's primary auctions.

The seven-year bond jumped by 25.03 bps to yield 7.8135%, while the three-year paper, the tenor closest to the remaining life of the issue on offer, climbed by 18.06 bps to close at 7.2497%. The 25-year notes, for their part, surged by 70.38 bps week on week to end at 8.2003%.

Inflation Picture

Philippine headline inflation accelerated to 7.2% in September from 6.1% in August and 1.7% a year earlier. The print matched the April pace and was the fastest in three and a half years, or since the 7.6% recorded in March 2023, marking the seventh straight month inflation remained above the central bank's 3% target.

Analysts said the September data strengthens the case for another Bangko Sentral ng Pilipinas rate hike. The Monetary Board's last two policy reviews of the year are scheduled for Oct. 22 and Dec. 17. Since April, the central bank has raised rates by a cumulative 75 bps, bringing the target reverse repurchase rate to 5%.

Retail Treasury Bond Proceeds

Meanwhile, the BTr raised P167.25 billion in new money from the RTB 32 after the public offer period closed on Oct. 7 — P84.86 billion of which came from the initial rate-setting auction on Sept. 29, while an additional P82.39 billion was raised during the offer period. The bureau said the amount raised from the bond exchange will be announced at a later date.

Middle East Escalation

The heightened inflation outlook comes amid escalating conflict in the Middle East. At least 12 people were killed and more than 300 wounded in an attack on Riyadh's international airport on Saturday, the deadliest in the kingdom in more than a decade, as the Iran-backed Houthis escalate a campaign they launched this summer, Reuters reported.

President Donald J. Trump said Washington was considering joining Saudi strikes on the Houthis in the conflict, a spillover from the war on Iran that the US and Israel launched in February.

Two previous attacks on King Khalid International Airport last week killed four people and caused heavy damage to a Saudi commercial plane parked on the tarmac. The strikes have exposed vulnerabilities in Saudi defense capabilities as the kingdom wages an air campaign against the Houthis in support of a ground war by the Yemeni government against the Iran-backed group. The Houthis have not claimed responsibility for the latest attack, but a Saudi-led military coalition vowed to respond.

Week's T-Bill Auction

Last week, the government raised P36.755 billion from the T-bills it offered, short of the P42-billion target, even as tenders reached P68.587 billion.

For the 91-day debt, the government awarded only P14.755 billion, below the P20-billion program, despite bids for the tenor reaching P25.505 billion. The three-month paper fetched an average rate of 5.667%, rising by 13.2 bps from the previous week. Accepted tenders carried yields from 5.565% to 5.7%.

The BTr, on the other hand, raised P15 billion as planned via the 182-day T-bills as tenders hit P25.022 billion. The average yield on the six-month T-bill stood at 5.971%, climbing by 10.9 bps week on week, with awarded bid rates from 5.889% to 6.05%.

Lastly, the Treasury sold its target P7 billion in 364-day securities as demand reached P18.06 billion. The one-year paper fetched an average rate of 6.214%, up by 9.9 bps, with accepted yields ranging from 6.1% to 6.25%.

Bond Auction Track Record

The reissued seven-year T-bonds to be offered on Tuesday were last sold on Aug. 18, when the government raised P20 billion as planned at an average rate of 6.988%, above the 6.375% coupon rate. The same notes were also offered on Sept. 15, but the BTr rejected all bids.

The 25-year papers were last sold on March 24, when the BTr raised just P5.565 billion out of the P10-billion plan as the average yield reached 7.4%, well above the 6.375% coupon.

Borrowing Program

The BTr is targeting P418 billion from the domestic market this month, split between P168 billion via T-bills and P250 billion through T-bonds. The government borrows from local and foreign sources to help fund its budget deficit, which is capped at P1.659 trillion, or 5.4% of gross domestic product, this year. The rates set at this week's auctions will directly shape part of the government's cost of servicing that deficit.

— Aaron Michael C. Sy with Reuters

Source: BusinessWorld