Banks will keep asking for a higher rate of return on government debt despite the Bureau of Treasury’s rejection of their bids at a T- bill auction yesterday, traders said.

The bureau of treasury has ditched bids for three successive auctions. Yesterday, it rejected bids for P6.5 billion ($160 million) worth of T-bills due to the steep rates demanded by banks. But dealers said inflation worries would keep yields high.

"Inflation is trending higher, we doubt the central bank will cut its rates," said a dealer from a local bank.

Demand for Monday’s offer was weak with only P5.6 billion tabled, as banks did not have any maturing debt to replace and preferred to keep their funds in the central bank’s special deposit account (SDA) window, which offers 5.5 percent interest for six months.

"There’s not much value if banks buy T-bills at levels below SDAs. How can we bid aggressively if clients do not like T-bills," said the dealer.

At Monday’s failed auction, most bids for the benchmark three-month paper sought yields above 5 percent although the average was 4.959 percent compared to 3.673 percent at the last successful auction on Jan. 21. The paper traded at 4.6 percent in the secondary market on Monday.

Both SDAs and T-bills are subject to 20 percent withholding tax but there are added transaction costs with T-bills.

The Treasury is considering scrapping T-bill auctions for the second quarter due to low demand. Yesterday was the third straight failed auction for 91-day and 182-day paper.

"We find the bids very unreasonable," acting national Treasurer Roberto Tan told reporters. "I don’t think the banks are serious in their bids."

The Treasury has also rejected bids for 4-year T-bonds and 7-year T-bonds in the last two weeks.

Manila said it may shift to issuing more Treasury bonds but traders said the plan might backfire as this may just further push up T-bond rates.

"The Treasury is also likely to reject high bids at T-bond auctions," said a dealer from another local bank.

The dealer said rates were likely to keep rising even in the secondary market as chances that the central bank will cut rates at its next policy meeting on March 13 are dwindling due to rising inflation.

Annual inflation in January hit 4.9 percent, it’s highest in more than a year, and is expected to keep climbing due to rising food and fuel prices.

The average rate of bids for the 182-day paper on Monday was 5.612 compared to 4.675 percent on Jan. 21 and for the 364-day bill was 6.041 percent compared to 5.266 percent on Feb. 4.

With the low turnout, Finance undersecretary and acting national treasurer Roberto Tan said the government may push through with the cancellation of T-bill issuances in the third quarter.

"We’ve not decided yet but we are studying it seriously. You know where banks are putting in their money," Tan said, referring to the central bank’s special deposit accounts which fetch a rate of more than five percent.

Tan did not pin the blame on the volatile political situation, although banks said the steep rates were pricing in the political risks.

"We find the bids very unreasonable. Apparently, there’s not much demand right now so we decided to reject the bids," he said.

Tan said the government will rely on cash flows from other sources like the $300-million loan coming from the Asian Development Bank this month. Revenues from the regular sources will also provide support to the budget, he said.