By Karl Angelo N. Vidal

TREASURY BONDS (T-bonds) on offer tomorrow are seen to fetch higher yields as investors factor in market jitters caused by expectations of interest rate hikes here and abroad.

The Bureau of the Treasury (BTr) plans to raise as much as P20 billion at Tuesday’s auction of fresh five-year T-bonds set to mature on March 3, 2023.

A bond trader said in a phone interview that banks will likely request for higher returns from the government, tracking the yield movement during the last auction.

“For yields, it will go higher around 5.35-5.5% [as yields jumped] from the last auction,” the trader said.

Another trader is “thinking of 5.25-3.375% range” as the Treasury may be forced to award at the 5.375% coupon rate.

Last week, the Treasury saw bids for the three-month, six-month and one-year Treasury bills rise to 2.989%, 3.265% and 3.428%, respectively, prompting BTr to reject all bids.

The first trader said that banks will likely raise ask for higher yields due to “market jitters.”

“The last inflation print put pressure for BSP (Bangko Sentral ng Pilipinas) to hike rates,” the trader noted, adding that economists are also expecting four rate hikes from the US Federal Reserve this year.

The effects of the tax reform pushed January inflation to a three-year high of 4%, landing in the upper band of the government’s 2-4% target and spurring market expectations of a rate hike from the local central bank.

BSP Governor Nestor A. Espenilla, Jr. attributed the spike in inflation to the implementation of the first tranche of the tax reform as well as to the rising fuel and food prices. He added that the inflationary effects of tax reform are likely temporary.

Meanwhile, analysts from First Metro Investment Corp. (FMIC) and the University of Asia & the Pacific (UA&P) expect March and April inflation to accelerate to 4.5%, adding that the BSP will likely raise its rates at its March 22 meeting.

“With breaching of the upper limit of the BSP’s inflation target and consistent with its desire to avoid overheating (especially manifested in asset prices), we think BSP will raise its policy rate by 25 bps (basis points) to 3.25% in Q1,” the FMIC said.

In the US, Fed Chair Jerome H. Powell vowed to stick with its plan to gradually hike their interest rates, prompting investors to increase their bets of a four rate increases this year.

“In the [Federal Open Market Committee’s] view, further gradual rate increases in the federal funds rate will best promote attainment of both of our objectives,” Mr. Powell said in a testimony before the US Congress as the new central banker last week.

On the other hand, traders added that there would be demand in tomorrow’s auction, but at a higher yield.

“With that rate hike fear, it took a toll on the market so bids have the tendency to pull back [and ask for higher returns],” the trader said.

“We would rather wait for the next few months [while they hike their rates] before getting into the bond market.”

The Treasury said it plans to auction off P120 billion worth of Treasury bills and another P120 billion worth of Treasury bonds in the January to March period.

The total amount the government intends to borrow from the local market is higher than the P200 billion it offered in the last quarter of 2017.

The government borrows from local and foreign sources to fund its budget deficit, which for this year is capped at 3% of the country’s gross domestic product.

The government targets a P888.23 billion gross borrowing plan this year.

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