Strong demand drives TDF yields down

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BSP
BANKS flocked to the shorter-tenored term deposits on Wednesday.

By Melissa Luz T. Lopez, Senior Reporter

BANKS CROWDED shorter tenors during this week’s auction of term deposits, driving yields down ahead of an expected rate hike from the Bangko Sentral ng Pilipinas (BSP).

Demand for term deposits totalled P92.125 billion yesterday, well above the P60 billion the central bank placed on the auction block. The overwhelming demand came after the BSP trimmed the offering from P90 billion last week, which was met with tenders worth P97.548 billion.

More than half of the bids went to the week-long tenor as players positioned ahead of the BSP’s monetary policy review today.

Banks wanted to place as much as P53.025 billion under the seven-day term, almost double the P30 billion dangled by the BSP and the P50.121 billion tenders received a week ago. As a result, players asked for an average yield of 3.4273%, lower than the 3.4434% fetched during the May 2 auction.

The 14-day instruments also received P33.005 billion in total offers on Wednesday, higher than the P20 billion up for grabs and the P30.661 billion bids received the prior week. The stronger appetite drove the average yield to 3.4551%, down from 3.4704% fetched previously.

Meanwhile, the 28-day tenor was nearly drained as the volume was slashed to P10 billion from P20 billion previously. Banks only betted P6.095 billion for month-long placements, barely filling the BSP’s offering.

This pushed the average rate higher to 3.4732% from 3.465%, closer to the central bank’s 3.5% ceiling.

The term deposit facility (TDF) is currently the central bank’s main tool in capturing excess funds in the local financial system. The BSP expects to keep market rates closer to the 3% benchmark by paying returns to banks who park their excess funds under the facility.

BSP Deputy Governor Diwa C. Guinigundo explained that the reduced TDF volume takes into account the banks’ preference to hold more cash to service withdrawals in light of Monday’s holiday for the barangay and youth council elections.

The central bank official also noted that market expectations for a tightening move from the central bank is a huge factor.

“The market’s preference for shorter tenors remain driven by its expectation of a BSP rate hike and higher demand for funds for the May 14 barangay election. Thus, the oversubscriptions for the seven and 14-day tenors serve to temper TDF rates which remain higher than the BSP policy rate,” Mr. Guinigundo said in a text message to reporters, referring to the three percent benchmark.

Market players are now pricing in a rate hike from the BSP as inflation maintained its ascent for the fourth straight month. BSP Governor Nestor A. Espenilla, Jr. last week acknowledged that inflation may have “spread somewhat” to cover more goods.

The central bank has been offering as much as P110 billion in term deposits in March and April, although the volume was trimmed to P90 billion ahead of the May 1 holiday and to P60 billion ahead of Monday’s election holiday.

“These trends are bound to normalize after the holidays and the barangay election and in response, the BSP restores the normal volume in the auction,” Mr. Guinigundo added, noting that they will adjust the offerings “as conditions warrant.”

Next Wednesday, the BSP will offer P80 billion in term deposits — P40 billion in seven-day deposits P30 billion in the 14-day tenor and P10 billion for the 28-day papers.