Gov’t rejects all bids for 5-yr T-bonds

The government rejected yesterday all bids for five-year Treasury bonds as banks sought higher returns due to inflation expectations brought about by soaring oil and food prices.

Had the auction committee accepted the offers, the average rate of the debt paper would have risen to 8.818 percent from an average rate of 8.495 percent previously.

Finance Undersecretary and National Treasurer Roberto Tan attributed the increase in rates to investors’ inflation expectations.

The Bangko Sentral ng Pilipinas (BSP) said on Monday that inflation rate in June would likely hit anywhere from 10.4 percent to 11.2 percent, the higher end of which meant that inflation was as its fastest pace since May 1994 when consumer prices had risen 11.5 percent. The National Statistics Office is set to announce on Friday the actual inflation rate in June.

“I suppose it’s due to inflation expectations,” Tan told reporters after the auction.

Nevertheless, Tan said the government’s auction committee can afford to reject bids as the Treasury had enough funds to cover its maturing obligations yesterday which amounted to P35 billion.

Government has been generating more revenues from value added taxes (VAT) given the skyrocketing prices of oil, food and other consumer goods.

Tan said banks’ offers were unreasonable despite their expectations of high inflation. He said it was difficult to predict whether the trend would continue in the coming weeks. “We’ll see how things go and we will respond appropriately,” Tan said.

During yesterday’s auction, total tenders reached P10.207 billion.

Because of inflation expectations, analysts expect the Bangko Sentral ng Pilipinas (BSP) to continue raising interest rates after its June 5 tightening.

Last June 5, the BSP raised rates for the first time since 2005, increasing the overnight borrowing and lending rates by 25 basis points to 5.25 percent and 7.25 percent, respectively.

The Development Bank of Singapore has said the BSP might may raise rates by 75 basis points on top of the June 5 hike.

The interest rate hikes are designed to help contain risks of a wage-price spiral by dampening activity.