The Federal Reserve Board's decision to boost short-term interest rates last week may reduce healthcare borrowers' finance costs and bolster investor confidence in healthcare bonds, investment bankers said last week.
The one-half-percentage-point increase in the central bank's federal funds rate and discount rate sends a strong signal that the Fed is serious about keeping a lid on inflation, experts said.
The Fed lifted the federal funds rate, the rate banks charge one another for overnight loans, to 4.75% from 4.25%. It increased the discount rate, the rate the Fed charges for loans to member banks, to 4% from 3.5%.
Major banks responded by raising their prime lending rate to 7.75% from 7.25%. The prime rate is the rate banks charge to their most creditworthy customers. It serves as benchmark for other interest rates.
The bond market rallied last week on the belief of investors that long-term interest rates would stabilize. After the Fed's announcement, the 30-year Treasury bond's yield dipped to 7.37%, down from 7.48% earlier in the day.
To the extent that the move makes long-term rates more predictable, the rate increase may make it easier to issue long-term debt, said David Johnson, a director in the healthcare finance department of Merrill Lynch's Chicago office.
"By the Fed taking an aggressive stance...it actually was very good news for the long-end of the market," particularly 20- and 30-year bonds, said Jim Forbes, a vice president with CS First Boston Corp. in New York.
On the day after the Fed's move, First Boston priced a $13 million tax-exempt bond issue for Western Health Network, Fargo, N.D., a subsidiary of Lutheran Health System in Fargo, at 6.35%. The AAA-rated deal would have been priced in the 6.45% to 6.50% range had short-term interest rates remained unchanged, Mr. Forbes said.
Before the rate increases, the rate for a 30-year, A-rated hospital bond issue was 6.9% while the rate for a 30-year AAA-rated issue was 6.48%.
The rate increase translates to "greater stability in the market" that will "give investors confidence that the Fed is on top of the economy," said Kathleen Costine, a senior managing director at Bear Stearns & Co. in New York.
But Ms. Costine warned that the looming issue for investors continues to be healthcare reform.
"Buyers are quite nervous about what's going on in Washington," she said.