Yields on central bank’s term deposits drop on strong demand for short tenor

By Melissa Luz T. Lopez,
Senior Reporter

SUSTAINED DEMAND for week-long term deposits drove yields even lower yesterday, although the central bank still opted to keep the month-long instruments off the market next week.

Banks wanted to place as much as P125.564 billion under the term deposit facility (TDF) on Wednesday, more than triple the P40 billion which the Bangko Sentral ng Pilipinas (BSP) placed on the auction block. These bids steadied from the P127.119-billion offers received a week ago.

As a result, the average interest rate on these seven-day instruments slipped further to 3.028% from the 3.2223% fetched during the Jan. 10 auction. Banks sought returns from a narrow spread of 2.9375% to 3.1%, the central bank said yesterday.

The TDF is currently the central bank’s main tool to shore up excess funds in the financial system. The window allows banks to park the idle cash they hold under the BSP in exchange for a small margin, which is determined through weekly bids hosted by the central bank.

BSP Deputy Governor Diwa C. Guinigundo said they are allowing funds to “flow back” into the banking system coming from seemingly tighter liquidity conditions observed in December, as they kept the weekly offerings limited to the seven-day tenor for the fifth straight week.

“Funds absorbed by retail Treasury bonds actually end up with BSP and subsequently withdrawn by national government for financing their current operations and capital spending. That means funds go back to the banks when suppliers and creditors are paid by national government,” the central bank official clarified.

Mr. Guinigundo added that funds handed out as loans as well as cash withdrawn during the holiday season are also returning to the banks by way of payments and deposits, which armed lenders with more excess cash which they now place under the TDF.

Despite this, the central bank will only offer P40 billion worth of week-long term deposits next Wednesday.

“Once the process is assessed to have regularized, we shall recalibrate our offerings in order to ensure that liquidity levels remain appropriately available,” Mr. Guinigundo said.

The BSP stopped offering 28-day term deposits on Dec. 20 as market players preferred the shorter instrument over the Christmas season, which seasonally sees stronger demand for cash among depositors.

Mr. Guinigundo has said they will consider restoring the 28-day tenor in due time and possibly offer a new term which would be longer than a week but shorter than a month, in response to market demand.

BSP Governor Nestor A. Espenilla, Jr. said separately that the central bank is closely monitoring liquidity conditions as they search for an opportunity to reduce the 20% reserve requirement imposed on big banks.

“We want to substitute reserve requirements with open market instruments without necessarily increasing liquidity,” Mr. Espenilla told reporters on Tuesday, as he noted that money supply is “coming back” to the financial system.