Banks seen buying more gov’t issued bonds

MANILA, Philippines — ANZ Research said banks may remain the largest buyer of bonds issued by the government this year despite the steady rise in lending.

Despite being the biggest taker of government-issued bonds, ANZ Research senior strategist for Asia Irene Cheung said the take-up rate of banks may dip to around 39 percent this year from a high percentage share of 41.5 percent in end-September last year.

Cheung said loan growth has remained robust, running at high double-digit levels, while the loan-deposit ratio is at a decade high of 78.4 percent.

According to Cheung, the central bank has signaled further cuts in banks’ reserve requirement ratio.

“But this is a longterm development and may not come about until the US Federal Reserve completes its hiking cycle and the peso is stable,” Cheung said.

Likewise, ANZ Research also said the take-up rate of government bonds by foreign investors would also decline to around eight percent from a five-year high of 11.6 percent in end-October last year.

In contrast to foreign investors, Cheung said insurance companies have sharply reduced their RPGB holdings in the second half of last year to a range of four to five percent due to the spike in long-dated bond yields on inflation concerns.

With inflation likely to ease further in 2019, the economist expects insurance companies to take up around eight percent of the net supply in 2019.

She said her projection of the government’s funding needs for 2019 is tentative at this stage as Congress has not yet passed the proposed P3.757 trillion 2019 budget.

“We assume, for now, a total funding need of P888.2 billion for 2019, the same as for 2018. The Bureau of Treasury’s auction calendar for Q1 2019 is broadly in line with our projection for the government’s quarterly funding need,” Cheung said.

The strategist pointed out falling inflation and a peak in the US hiking cycle would help support the bond market in 2019, even though foreign interest would likely ease after a strong pickup in the fourth quarter.

If demand falls short, Cheung said a retail bond offer is highly possible.

The government is raising P360 billion in the first quarter through the auction of 91, 182, and 363-day Treasury bills worth P240 billion as well as Treasury bonds worth P120 billion.

“We have also assumed a 35:65 split between offshore and domestic funding, as in 2018,” Cheung said.

The government has been looking at a dollar bond issue since late 2018, and this is likely to occur in early 2019.

“As seen in recent years, the BTr taps the offshore market in January or February, usually with a benchmark bond of 10 or 25 years of $1 to $2 billion,” Cheung said.