Oil shock from Iran war may push T-bill, bond yields higher

By Aaron Michael C. Sy, Reporter

YIELDS on Philippine Treasury bills (T-bills) and Treasury bonds are expected to rise this week as surging oil prices linked to escalating war in the Middle East dampens investor appetite for government debt.

The Bureau of the Treasury plans to auction P27 billion in Treasury bills on Monday, offering P9 billion each in 91-, 182-, and 364-day securities.

On Tuesday, the government will offer P20 billion to P30 billion in reissued 10-year Treasury bonds with a remaining life of nine years and 11 months.

Yields might track the sharp increase in the secondary market late last week after global crude prices climbed above $100 per barrel, Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said in a Viber message.

“Higher global crude oi prices could lead to faster inflation and slower economic growth,” he added.

Oil prices surged as markets reacted to the intensifying conflict between the US and Iran. Front-month West Texas Intermediate crude futures settled at $98.71 per barrel, up 3.11%, whilst Brent crude rose 2.67% to $103.14, settling above $100 per barrel for the first time since August 2022, according to Reuters.

Higher energy prices tend to push inflation expectations upward, which in turn raises bond yields as investors demand higher returns.

At the secondary market on Friday, yields on short-term government securities jumped sharply. The 91-day Treasury bill rose 32.1 basis points (bps) to 4.858%, the 182-day paper climbed 26.35 bps to 4.8516%, and the 364-day bill increased 36.39 bps to 5.0297%, based on data from the Philippine Dealing System using PHP Bloomberg Valuation Service Reference Rates as of March 13.

The 10-year bond yield also climbed 30.66 bps to 6.6248%, signaling higher borrowing costs for the government if weak demand persists.

A trader said demand at this week’s auctions could remain subdued amid uncertainty over the geopolitical situation and the outlook for oil prices.

“I expect tepid demand on the bills and bond auction next week as the Middle East war continues to escalate,” the trader said in an e-mailed reply to questions, adding that the 10-year bond could fetch an average rate of around 6.625% to 6.675%.

The market reaction follows comments from Donald J. Trump that the US would hit Iran “very hard over the next week,” raising fears of a wider conflict that could disrupt global energy supplies.

Higher oil prices could also complicate the economic outlook. Arsenio M. Balisacan, secretary of the Department of Economy, Planning, and Development, earlier said inflation could exceed 7% and economic growth could slow by as much as 0.3 percentage point this year if the oil price shock linked to the conflict intensifies.

Last week’s Treasury bill auction already reflected weaker demand. The government raised P19.2 billion, falling short of its P27-billion target, after total bids reached P31.536 billion, far below the P76.546 billion recorded in the previous week.

The Treasury awarded P8.15 billion in 91-day bills, P6.3 billion in 182-day securities and P4.75 billion in 364-day debt, all below their P9-billion programs.

Average yields also climbed sharply, with the three-month bill rising 36.6 bps to 4.677%, the six-month paper increasing 37.8 bps to 4.795% and the one-year security gaining 28.5 bps to 4.849%.

The 10-year bonds to be offered on Tuesday were first issued on Feb. 23, when the government raised P297.94 billion at a 5.925% coupon rate and an average yield of 5.893%.

For March, the Treasury aims to raise P248 billion from the domestic market, composed of P108 billion in Treasury bills and P140 billion in Treasury bonds.

The government taps both local and foreign borrowing to help finance its fiscal deficit, which is capped at P1.647 trillion or 5.3% of gross domestic product this year.