US Fed hike expected to push borrowing rates higher


MANILA, Philippines — The government is facing another week of difficulty raising 50 billion pula from the securities auction due to pressures stemming from the U.S. Federal Reserve’s decision to raise interest rates.

A bond trader said the Treasury Office may find it difficult to release treasury bills (T-bills) worth 15 billion pesos and 35 billion pesos in treasury bills (T-bonds) offered Monday and Tuesday.

The trader said investors would seek increased yields for their offerings to reflect the impact of the US Fed’s decision to raise benchmark rates by 25 basis points.

The trader expects 91, 182 and 364 day Treasury bill rates to rise 5 to 10 basis points across the board. On the other hand, seven-year Treasury bills with a remaining duration of six years and four months will breach market prices again.

Treasury yields will see an increase of 5 to 10 basis points as investors may flock to these maturities to avoid long-term risk. We haven’t forecast Treasury bond rates yet, but expect them to trend higher,” the trader said.

The U.S. Fed last week approved its first rate hike since 2018 in the first of many moves to deal with inflationary pressures.

The US central bank had kept the interest rate near zero in response to the impact of the pandemic, but had to raise the benchmark due to rising commodity prices.

The Fed also signaled that up to six rate hikes could come this year as part of plans to lift emergency measures during the recovery period.

US inflation soared 7.9% in February, the highest since 1982, even before crude prices surged on lingering tensions between Russia and Ukraine. The Fed then finds itself in a difficult position to propel borrowing costs, reduce demand for big-ticket items and, in turn, bring inflation under control.

Domestically, the Treasury has found it difficult to borrow even in the local market as investors demand higher yields. The agency raised just 22.172 billion pesos against a 250 billion peso program with just four auctions remaining in March.

Likewise, investors remain on the defensive in the face of soaring commodity prices, as fuel prices climb week after week due to escalating conflict in Europe.

The policy-setting Monetary Council will meet on Thursday to discuss whether the benchmark rate should be kept at an all-time high of 2%.

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