US Fed hike seen to drive up borrowing rates

MANILA, Philippines — The government is facing yet another week of difficulty in raising P50 billion from the auction of securities due to the pressures arising from the US Federal Reserve decision to hike interest rates.

A bond trader said the Bureau of the Treasury could find trouble in releasing the Treasury bills (T-bills) worth P15 billion and P35 billion in Treasury bonds (T-bonds) on offer on Monday and Tuesday.

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

The trader expects rates for 91-day, 182-day and 364-day T-bills to go up by five to 10 bps across the board. On the other hand, the seven-year T-bonds with a remaining term of six years and four months will breach market pricing yet again.

“The T-bill yields will see an increase of five to 10 bps, as investors may flock to these tenors to avoid long-term risks. We have yet to forecast the rates for the T-bonds, but we expect it will be on the upward bias,” the trader said.

The US Fed last week approved its first rate hike since 2018 in a first of many moves to weather inflationary pressures.

The US central bank had kept the interest rate at near zero in response to the pandemic’s impact, but had to push the benchmark up due to price hikes across commodity prices.

The Fed also signaled that as many as six rate hikes may come within the year as part of plans to lift emergency measures during the recovery period.

US inflation spiked by 7.9 percent in February, the highest since 1982, even before crude prices jumped on the ongoing tensions between Russia and Ukraine. The Fed then finds itself in a tight spot to propel borrowing costs, cut demand for big-ticket items and, in turn, tame inflation.

On the domestic end, the Treasury has faced difficulties borrowing even from the local market investors demanded higher yields. The agency has raised just P22.172 billion against a program of P250 billion with only four auctions left in March.

Likewise, investors stay on the defensive with commodity prices kicking, as fuel rates spike one week after the other due to the escalating conflict in Europe.

The policy-setting Monetary Board will convene on Thursday to discuss whether the benchmark rate should be maintained at a record-low two percent.