The Philippine government awarded more Treasury bills (T-bills) than initially offered at Monday's auction as yields declined across all maturities, buoyed by robust investor demand and receding expectations of further aggressive rate hikes from the Bangko Sentral ng Pilipinas (BSP).

The Bureau of the Treasury (BTr) raised P58.8 billion, exceeding the P42-billion offering after total tenders reached P184.224 billion — more than four times the amount on the auction block. The bid-to-cover ratio of roughly 4.4x underscored ample liquidity in the domestic financial system. Demand also surpassed the P167.742 billion in bids recorded the previous week.

The Treasury doubled accepted noncompetitive bids across all three tenors — the 91-day, 182-day, and 364-day — to P16 billion, P12 billion, and P5.6 billion, respectively, according to a BTr statement. The awards were increased after every tenor fetched average rates below those recorded at the prior week's auction.

91-Day T-Bills

The Treasury borrowed P28 billion via three-month securities, above the P20-billion offer, with bids totaling P57.895 billion. The average rate settled at 4.995%, down 4.2 basis points (bps) from 5.037% a week earlier. Accepted yields ranged from 4.949% to 5.028%.

182-Day T-Bills

For the six-month tenor, the government raised P21 billion, surpassing the P15-billion plan, as tenders reached P89.752 billion. The average yield fell 10.7 bps to 5.545% from 5.652% previously, with awarded rates between 5.49% and 5.578%.

364-Day T-Bills

The BTr sold P9.8 billion in one-year securities, above the P7-billion program, with demand totaling P36.577 billion. The average rate dropped 18.9 bps to 5.723% from 5.912% the prior week. The BTr accepted only bids carrying the average yield. The steeper yield decline at the longest T-bill tenor reflected market expectations that the BSP's tightening cycle is nearing its peak.

Secondary Market Levels

Before Monday's auction, the 91-, 182-, and 364-day T-bills were quoted at 5.0342%, 5.436%, and 5.8636%, respectively, based on PHP Bloomberg Valuation Service Reference Rates data from the Treasury.

Drivers Behind the Yield Decline

T-bill rates declined amid tempered expectations of large rate hikes by the central bank, as inflationary pressures eased on the back of a softer US dollar and lower global crude oil prices, compounded by slower Philippine economic growth in the second quarter, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message. A weaker dollar typically supports the Philippine peso, which helps contain imported inflation — a dynamic relevant to the BSP's policy calculus given the country's reliance on dollar-denominated commodities including fuel.

BSP Governor Eli M. Remolona, Jr. said on Monday that the central bank remains prepared to tighten policy further to address still-elevated inflation, but acknowledged there is less pressure to do so after GDP growth fell to a new post-pandemic low last quarter. The remarks highlight the emerging policy dilemma: further rate increases risk deepening the economic slowdown, while inflation remains well above the central bank's target band.

The Monetary Board raised benchmark interest rates by 25 bps in June for a second consecutive meeting, bringing the policy rate to 4.75%. Its next review is scheduled for Aug. 27.

Philippine Macroeconomic Backdrop

Philippine GDP growth slowed to 2.3% in the second quarter, down from 5.4% in the same period a year earlier and 2.8% in the first quarter. This marked the slowest expansion since the fourth quarter of 2009, excluding the pandemic period.

For the first half, GDP growth averaged 2.6%, falling below the government's 3.5%–4.5% full-year target.

Headline inflation eased to 6.2% in July from 6.4% in June — the slowest pace in four months, or since 4.1% in March. The July figure also fell within the BSP's 5.6%–6.6% forecast range for the month.

Year to date, inflation averaged 5%, well above the central bank's 3% target and its 2%–4% tolerance band.

US Market Influence

"T-bill rates tracked the movement in US Treasury yields as the dollar continues to weaken due to the lower-than-expected jobs data this July," a trader said in a text message.

The US dollar steadied near a two-month low on Monday following Friday's soft employment data, as investors awaited this week's inflation figures for further signals on the Federal Reserve's rate trajectory, Reuters reported.

Data released Friday showed the US economy unexpectedly shed jobs in July, while job gains for the preceding two months were revised sharply lower, dampening expectations for a Fed rate hike next month. The futures market reduced the probability of a September move to approximately 44%, down from 67% a week earlier.

US Treasury yields largely held their declines after the jobs report undercut hike bets, with benchmark 10-year note yields last at 4.647%. The dollar index, which measures the currency against six major peers, was little changed at 99.62 after touching its lowest level since June 15 on Friday.

Upcoming Auctions

On Tuesday, the government aims to raise P30 billion from reissued 10-year Treasury bonds (T-bonds) with a remaining life of seven years and six days.

The Treasury plans to borrow P330 billion from the domestic market in August — P200 billion via T-bills and P130 billion through T-bonds.

The government borrows from both local and foreign sources to help fund its budget deficit, which is capped at P1.659 trillion, or 5.4% of GDP, this year. Lower yields at Monday's auction could reduce the government's debt-servicing costs in the near term, particularly as it front-loads its domestic borrowing program for the second half.

— Aaron Michael C. Sy with Reuters