Yields on central bank’s term deposits slip after Fed pause

Yields on the central bank’s term deposits slipped on Wednesday following the widely expected pause from the US Federal Reserve and ahead of the Bangko Sentral ng Pilipinas’ (BSP) policy meeting.

Total tenders for the central bank’s term deposit facility (TDF) stood at PHP 235.933 billion on Wednesday, above the PHP 230 billion it auctioned off but lower than the PHP 286.877 billion in bids for a PHP 240-billion offer last week.

Broken down, the eight-day papers fetched bids amounting to PHP 144.275 billion, surpassing the PHP 120-billion offering but below the PHP 153.73 billion in tenders for a PHP 130-billion offer last week.

The tenor is longer than the usual seven-day deposits offered by the BSP due to a holiday on June 28 in observance of Eid’l Adha.

Accepted rates for the eight-day TDF tenor were from 6.525% to 6.605%, a lower band compared with the 6.55% to 6.6144% logged a week ago. This caused the average rate for the one-week term deposits to inch down by 0.98 basis point (bp) to 6.5835% from 6.5933% previously.

Meanwhile, demand for the 14-day deposits amounted to PHP 91.658 billion, below the PHP 110 billion on the auction block as well as the PHP 133.147 billion in bids for the same offer amount seen on June 14.

Banks asked for yields ranging from 6.57% to 6.63%, a narrower and higher margin compared with the 6.5% to 6.6299% in the previous auction. This brought the two-week tenor’s average rate to 6.5966%, down by 0.15 bp from the 6.5981% seen a week ago.

The BSP has not offered 28-day deposits for more than two years to give way to its weekly auctions of bills with the same tenor.

The term deposits and the BSP bills are instruments used by the central bank to mop up excess liquidity in the financial system and guide market interest rates.

The lower TDF yields seen on Wednesday were due to the widely anticipated tightening pause by the Fed last week, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The Fed decided to keep its target interest rate unchanged at 5-5.25% during its June 13-14 meeting, the first pause after it raised borrowing costs by 500 bps since March last year.

Still, markets are betting on a 25-bp increase from the Fed at its policy meeting on July 25-26 as its policy statement last week hinted on more small rate hikes before 2023 ends.

Meanwhile, the BSP is widely expected to keep benchmark interest rates steady on Thursday, based on a BusinessWorld poll of 15 economists conducted last week.

If realized, this would be the second straight meeting the BSP will leave its policy rate untouched at 6.25%. The BSP hiked borrowing costs by 425 bps from May 2022 to March 2023 to tame inflation.

Any decision made by the US central bank could be mirrored by the BSP to maintain a healthy interest rate differential to stabilize the foreign exchange rate, Mr. Ricafort said. — Keisha B. Ta-asan