High bids force partial rejection of CMBs

The government was forced yesterday to accept a high rate of 7.312 percent interest rate on 42-day cash management bills (CMBs) as banks continued to test the government’s resolve to stick to its deficit program.

The Bureau of Treasury (BTr) managed to temper the rate by awarding only P2.06 billion, half of the P4 billion on offer. Bids reached P5.045 billion. Traders expect the rate to hover at 7.5 percent to eight percent.

National Treasurer Mina Figueroa estimated the average yield would have been 6.78 percent were it not for uncertainties over who will win the May 10 elections.

"This is an abnormal time," Figueroa said.

The government, which usually issues T-bills and bonds to help finance its budget deficit, floated CMBs after investors proved reluctant to buy longer-dated debt ahead of the election.

The government last offered CMBs–which have maturities of 30 to 71 days–in late 2000 to thwart sharp increases in T-bill rates after a corruption scandal hit then President Joseph Estrada.

The Treasury rejected all bids at three T-bill auctions last Monday and at an auction of two-year bonds the following day as investors worried about political uncertainty demanded yields deemed too high by the government.

Treasury officials said they would rather borrow through short-term CMBs at high rates than be stuck with three-month T-bills at the rates offered by the banks.

Figueroa said the initial target rate was below 7.5 percent but the auction committee was unwilling to accept higher rates.

Figueroa insisted that the BTr’s cash position was "healthy" but said the committee accepted part of yesterday’s bids because the BTr had no maturities anyway.

"It’s an act of desperation if we accepted all the bids," Figueroa said. "There was liquidity in the market and there was a demand for the CMBs but the rates were higher than we expected."According to Figueroa, the BTr’s feedback from banks indicated that they are willing to take T-bills again "at prevailing rates."

But Figueroa insisted that the BTr had no intention of allowing rates on the benchmark 90-day T-bills to go up to eight percent. The comment set the tone for the next T-bills auction should the BTr decides to give up on the CMBs.

However, Figueroa argued that the prevailing rates only reflected the sentiments of the market. Without political concerns, she said the rates on the CMBs should have been six to seven percent.