Peso liquidity squeeze, global inflation push up government long-term IOUs

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Following the government’s recent massive ₱300 billion Treasury note issuance, the national government has secured long-term debt at higher interest rates, reflecting investor adjustments to reduced peso liquidity and lingering global inflation concerns.

On Tuesday, April 29, the Bureau of the Treasury (BTr) successfully raised ₱30 billion through the auction of five-year bonds. Bids totaled ₱55.2 billion, nearly double the amount offered.

It dropped from the previous round’s ₱80.8 billion total bids. Despite the lower demand, the government fully awarded the ₱30 billion on offer.

The bonds, with a remaining maturity of five years and two months, were awarded at an average rate of 5.943 percent. 

This was 2.22 basis points higher than the five-year based on the PHP Bloomberg Valuation (BVAL) Service Reference Rate of 5.92 percent.

It was also 3.5 basis points above the 5.908 percent yield from the previous auction on April 2.

According to Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., the rise in interest rates came after the recent ₱300 billion 10-year local Treasury note issuance “siphoned off some of the excess peso liquidity from the financial system.”

However, the increase was partly offset by falling global crude oil prices—now near four-year lows—which may help ease inflation, he said. 

Ricafort noted that investors are also closely watching for the potential inflation impact of new US tariffs under Trump, which could influence the timing of possible US Federal Reserve (Fed) rate cuts. 
Markets currently expect more than three 25-basis point Fed cuts this year, with the first possibly starting in June.

The Philippines favors domestic borrowing, through treasury bills and bonds, over foreign borrowing. This strategy leverages the ample liquidity of domestic banks and creditors while mitigating foreign exchange risks and volatility.