T-bonds oversubscribed amid inflation-driven rise in rates

MANILA, Philippines—The Bureau of the Treasury on Wednesday (Nov. 3) sold all P35 billion of the reissued five-year bonds it offered despite a further rise in yields.

The IOUs—with a remaining life of four years and five months—were awarded at an annual rate of 3.762 percent, up from 3.576 percent in October as bid rates hit a high of 3.87 percent and a low of 3.65 percent.

Tenders reached P46.6 billion, making the auction oversubscribed.

National Treasurer Rosalia de Leon said the Treasury expected a higher rate submission, but in case bids got too high, the government was in a good cash position to reject offers.

Rising rates came on the back of jittery investors amid elevated inflation and the anticipated tapering of the US Federal Reserve.

Economists at UK-based Oxford Economics said at an online seminar last week that the Philippines and most Asian economies were in a better shape now compared to the so-called “taper tantrum” in 2013 when bond yields spiked.

De Leon pointed to the assurance by the Bangko Sentral ng Pilipinas (BSP) that inflation will eventually return within the target range.

Last week, investment banking giant Goldman Sachs said that base effects from this year’s elevated prices plus food imports flooding the market would revert inflation in the Philippines within the government’s target range early next year.

“We forecast higher headline inflation in 2022, compared to our prior forecasts, in all countries except the Philippines,” said Goldman Sachs Economics Research in an Oct. 26 report on Asean.

“Easing food supply constraints in the Philippines could push headline inflation meaningfully lower by early 2022,” the report said.

Goldman Sachs slightly lowered its 2022 inflation forecast for the Philippines to 3.2 percent from 3.3 percent previously, while updated estimates for Indonesia, Malaysia, Singapore and Thailand all rose. But the projected rate of increase in prices of basic commodities in the Philippines would remain the highest in the region in 2022.

For 2021, Goldman Sachs slightly jacked up its inflation estimate for the Philippines to 4.5 percent from 4.4 percent. Inflation in the Philippines this year would be the fastest among the five Asean countries, according to the Goldman Sachs report.

Goldman Sachs tagged two reasons that kept inflation above the BSP target of 2 to 4 percent—swine flu and typhoon-related disruptions in fish and vegetable supply.

Inflation averaged 4.5 percent as of end-September, higher than what the BSP deemed as manageable price hikes conducive to economic growth and recovery.

“Next year, as food supply constraints ease amid favorable base effects, we expect headline inflation to fall to 3 percent year-on-year by early 2022,” Goldman Sachs said.

“Thereafter, rising core inflation pressures and increases in utility rates (which respond to increases in global energy prices with a lag), should offset declining contributions from fuel price increases and keep inflation near 3 percent year-on-year,” it said.

“Food supply constraints remain a key bi-directional risk to our forecasts, as if supply constraints tighten further in coming months — then the food inflation trajectory could be higher than we currently forecast, or vice versa,” it added.

The National Economic and Development Authority (Neda) and the Department of Finance (DOF) have been flagging delayed pork importation despite President Rodrigo Duterte’s string of executive orders (EOs) which reduced tariffs to augment domestic supply.

Most of the imported pork so far were also being distributed in Metro Manila, which resulted in declining retail prices in the National Capital Region even as price levels outside NCR remained elevated.

The government will also import fish during the closed fishing season, while chicken and lowland vegetable supplies were expected to end the year with surpluses. However, supply of highland vegetables may fall short of this year’s demand, Neda said last Monday (Nov. 1).

Across Asean, Goldman Sachs said it expects faster price increases on average next year as global oil prices recently hit highs due to normalizing demand.

TSB