Term deposit yields drop on Fed cut bets

Yields on the Bangko Sentral ng Pilipinas’ (BSP) term deposits went down on Wednesday despite hawkish signals from the central bank chief recently as investors expect rate cuts in the United States next year.

The central bank’s term deposit facility (TDF) attracted bids amounting to PHP 242.295 billion on Wednesday, above the PHP 230 billion on the auction block. However, this was below the PHP 324.325 billion in tenders seen a week ago for the same offer volume as the 14-day tenor went undersubscribed on Wednesday.

Broken down, tenders for the seven-day papers reached PHP 137.115 billion, higher than the PHP 120 billion auctioned off by the central bank but lower than the PHP 194.105 billion in bids last week.

Banks asked for yields ranging from 6.6% to 6.63%, a tad narrower than the 6.6% to 6.65% band seen a week ago. This caused the average rate of the one-week deposits to decline by 1.82 basis points (bps) to 6.6147% from 6.6329% previously.

Meanwhile, bids for the 14-day term deposits amounted to PHP 105.18 billion, below the PHP 110-billion offering and the PHp 130.22 billion in tenders seen on Dec. 20.

Accepted rates were from 6.6% to 6.68%, slightly wider than the 6.625% to 6.68% margin recorded a week ago. With this, the average rate for the two-week deposits inched down by 1.61 bps to 6.6402% from the 6.6563% logged in the prior week’s auction.

The BSP has not auctioned off 28-day term deposits for more than three years to give way to its weekly offerings of securities with the same tenor.

The term deposits and the 28-day bills are used by the central bank to mop up excess liquidity in the financial system and to better guide market rates.

TDF yields went down despite signals of “higher for longer” rates from the BSP chief, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message, as market players continue to expect 150 bps in rate cuts from the US Federal Reserve as early as March 2024.

These cuts could be matched locally amid easing inflation in the Philippines, Mr. Ricafort added.

BSP Governor Eli M. Remolona, Jr. last week said the central bank is unlikely to deliver any benchmark interest rate cuts in the next few months and is leaning towards keeping borrowing costs higher for longer.

The BSP will only begin policy easing if inflation settles within a “comfortable” range or the midpoint of its 2-4% target band, Mr. Remolona said.

The central bank raised borrowing costs by a total of 450 bps from May 2022 to October this year, bringing the policy rate to a 16-year high of 6.5%.

The BSP has said inflation will settle within the 2-4% target in the first quarter of 2024 but could overshoot the target again from April to July partly due to the El Niño weather event.

In the first 11 months of 2023, headline inflation averaged 6.2%, still above the BSP’s 6% forecast and 2-4% target for the year.

Meanwhile, the US central bank kept borrowing costs unchanged at 5.25-5.5% for the third straight time earlier this month. This was after it hiked policy rates by 525 bps from March 2022 to July 2023.

Markets are now pricing in a 79% chance of a rate cut starting in March 2024, according to CME FedWatch tool, with over 150 bps of cuts priced in for next year, Reuters reported. — Keisha B. Ta-asan with Reuters