Under government’s domestic note issuance programme, the BoB floats bonds and Treasury Bills each month to raise debt for government in the capital market. The programme’s ceiling was raised to P55 billion earlier this year after the previous P30 billion cap was reached in February, due to more aggressive borrowing caused by stubborn budget deficits and pandemic spending.
At the auctions, primary dealers, who are exclusively banks, compete to lend to the government by offering the yields or returns they are seeking. The BoB decides the 'stop-out' yield or the maximum 'interest' level it is willing to pay the dealers on the particular securities on offer.
The funds are critical for plugging the budget deficit, which this year is expected to grow from the original estimate of P8.7 billion, due to the downturn in diamonds.
In a notice to the market this week, the BoB indicated that it would seek to raise P1.5 billion through three bonds and the balance of P2.2 billion through three Treasury Bills in an auction on October 25. The bonds have maturities ranging from 2027 to 2043 and are all reopenings of previously listed bonds, whilst the Treasury Bills carry maturities of between three and 12 months.
Whilst the BoB has been enjoying full allotment at its auctions in recent times aided by the extra cash in the market from the repatriation of pension fund assets, the auctions have been underperforming since July. The underperformance has largely been on the longer maturing bonds, while the shorter-term Treasury Bills have enjoyed over-subscription.
Yields have been trending higher this year, with the returns on the longest-maturing bond, the 2043 bond, increasing from 8.37 percent at the beginning of the year to 9.19 percent in October.
Analysts have previously pointed out that under-allotments have taken place where the market demands higher yields than the BoB is willing to accommodate. The under-allotment was particularly strong from September 2020 when the increase of the debt ceiling to P30 billion met with a sovereign credit downgrade and escalating inflation.
BoB officials recently played down the under-allotments, saying the bank was still on track to deliver the government’s borrowing target for the financial year. According to the borrowing strategy document for 2024–2025 released in April, the central bank seeks to raise P15.25 billion from the capital market this financial year on behalf of government.
“There was an under-allocation to long-rated bonds at the last auction (July), but over the last two years we have seen significant demand for our bonds which is driven by the investor community especially institutional investors which are pension funds,” Lesego Moseki, the BoB’s financial markets director told media in August. “From time to time, you will see over or under-allocation at specific points, but we have not yet seen a trend that shows declining appetite for our bonds. “We are still quite optimistic that the government will be able to raise the funding that it requires.”
