Treasury chief sees end to below 1% T-bill rates

MANILA, Philippines – The country’s treasury chief said the looming end of low interest rates abroad could jumpstart slightly higher borrowing costs for the government, resulting in an end to below one-percent yields in Treasury bill auctions.

Nevertheless, National Treasurer Rosalia de Leon said she still expects local bond issuances to enjoy good reception from domestic investors looking to park trillions of pesos in cash.

“The hard realization remains that emerging market economies, which some say benefitted the most from global boost to liquidity, now face the inevitable end to the era of low interest rates,” De Leon said in a speech Friday.

Asked later on if she still expects below one-percent rate on twice-a-month auctions, De Leon simply told reporters: “I wish.”

US Federal Reserve Chairman Ben Bernanke hinted last month that the world’s largest economy may scale down its economic stimulus measures “later this year.”

The condition, he said, was leveraged on solid evidence the US economy is sustainably recovering from the global financial crisis that started in 2008.

That statement, however, appears in contrast with Bernanke’s pronouncement last week that he favors keeping an accommodative policy over the “foreseeable future.”

For De Leon, this showed how contentious the Fed discussions were.

“There were mixed signals, but what I got was even if they try to pull back in QE (quantitative easing), it does not necessarily mean (they) would raise rates,” De Leon pointed out.

“However, we would see less inflows coming from QE,” she explained.

The $85-billion bond buying program of the US has flooded the world economy with cheap money, most of which found their way to emerging markets like the Philippines where returns were higher.

That development has pushed Philippine Treasury bill rates to historic-lows, with the benchmark three-month paper hitting a record 0.04 percent. Treasury bonds, or those with longer maturities, also enjoyed low returns.

As the QE fate lies in limbo, De Leon said “heightened volatility” in the financial markets may persist, resulting in lower stock valuations and higher yields in the bond market. She, however, was quick to quell concerns.

For one, she said the government continues to expect “strong appetite” for its auctions, with strong macro-fundamentals in place, especially expectations inflation will remain stable over the medium term.

“There will be strong appetite in the long-end of the curve,” she said.

In addition, high domestic liquidity could provide “onshore support” for government securities as foreigners fly back to the US.

For instance, De Leon pointed to the central bank’s move to ban certain placements in the special deposit accounts (SDA), host to trillion-peso amount of idle money, which in turn could find their way to peso state issuances.

The Bangko Sentral ng Pilipinas, in an effort to push out funds to the economy to finance growth, has slashed SDA returns by 150 basis points and prohibited singular investment management placements in the facility. –(The Philippine Star)