By Melissa Luz T. Lopez,
Senior Reporter

YIELDS on week-long term deposits dropped yesterday amid strong demand as the central bank decided to stop offering month-long instruments to target excess funds held by lenders.

Banks swarmed the seven-day tenor as bids reached P46.212 billion, well above the P40 billion dangled by the Bangko Sentral ng Pilipinas (BSP) on Wednesday. This also reversed the P38.92 billion in total tenders received the previous week which settled below the offering.

Wednesday’s auction marked the first time that the central bank removed the option to bid for 28-day term deposits as lenders had a smaller surplus of cash ahead of the holiday season.

The average yield dropped to 3.4004% on the back of strong appetite for these placements, down from the 3.4542% rate fetched during the Dec. 13 offering. Banks asked for returns ranging from 3.125-3.5%.

The term deposit facility (TDF) is currently the central bank’s main tool to capture excess funds in the financial system by allowing banks to park the extra cash they hold under the window, in exchange for a small return.

Through this, the BSP expects to influence market rates to log closer to the 3% benchmark rate, coming from below the 2.5% floor of the interest rate corridor.

BSP Deputy Governor Diwa C. Guinigundo said that lenders were sitting on a smaller stash of idle funds under the TDF, which merits a drastic reduction in the weekly auction volume.

“Based on our liquidity forecast, we need to mop up as much as P40 billion. Since the 28-day TDF was scrapped and the BTr (Bureau of the Treasury) rejected all bids recently, banks competed for the unchanged volume of the seven-day TDF,” Mr. Guinigundo said in a text message to reporters.

The Treasury rejected all bids for reissued five-year bonds on Tuesday for the fourth consecutive time after the government raised P255.4 billion in retail bonds in November.

Banks instead chose to use their money supply by granting more loans, buying foreign exchange, paying off debts, and acquiring additional investments, the central bank official said.

Anticipation for increased cash requirements over the Christmas season — or when families withdraw more cash to spend for celebrations and gift-giving — may have also prodded banks to hold on to more cash rather than lock them in for a month under the TDF.

For next week, the BSP again kept the auction volume at P40 billion for the week-long tenor and none under the 28-day term. This offering is the smallest since the P30-billion inaugural offering in June last year when the weekly TDF auctions started.

Mr. Guinigundo has said that the shorter tenor lends more “flexibility” for banks in managing their funds and servicing client demands.

The BSP held fire on monetary policy at its policy meeting last week as inflation remains within target and with economic growth remaining upbeat, which came despite a fresh rate hike in the United States that would trigger rising global yields.

As expected, the Monetary Board kept borrowing rates unchanged during its eighth and final policy review for 2017.

The BSP will hold its next monetary policy review on Feb. 8, 2018.