TDF yield climbs on hawkish BSP, Fed

THE CENTRAL BANK’S term deposit facility (TDF) fetched a higher average yield on Wednesday, even as the offer continued to be oversubscribed, amid expectations of hawkish monetary policy here and in the United States.

The seven-day term deposits auctioned off by the Bangko Sentral ng Pilipinas (BSP) attracted P146.927 billion in tenders this week, higher than P110 billion up for sale but slightly below the P147.021 billion in bids recorded for the same offer volume previously.

As a result, the bid-to-cover ratio went down to 1.3357 times from the 1.3366 ratio seen last week.

Still, the BSP made a full P110-billion award of its offer.

Accepted rates for the one-week papers were from 4.25% to 4.7449%, a tad wider than the 4.25% to 4.74% band seen in the previous auction. This caused the weighted average accepted rate for the term deposits to rise by 5.72 basis points (bps) week on week to 4.6816% from 4.6244%.

The seven-day term deposit’s average yield climbed amid hawkish policy signals from both the BSP and the US Federal Reserve, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The Philippine central bank has already signaled further hikes as it expects inflation to remain elevated, and he said the P85 minimum wage hike in Metro Manila could lead to additional second-round price effects.

Still, the TDF average auction rate remained below the BSP’s overnight borrowing rate of 4.75%, Mr. Ricafort noted, which was supported by the strong demand seen for the offering that likely reflects excess liquidity in the banking system.

The Monetary Board on June 18 raised benchmark interest rates by 25 bps for a second straight meeting to address persistent price pressures from the Middle East war-driven oil shock and keep inflation expectations anchored.

Meanwhile, the US central bank last month left its benchmark overnight interest rate in the 3.5%-3.75% range, but updated quarterly projections showed policymakers expected to raise borrowing costs this year, Reuters reported.

Fed funds futures traders are pricing in 65% odds of a Fed rate increase by September. Cleveland Fed President Beth Hammack said on Tuesday it remains possible that she’ll advocate for higher interest rates if inflation pressures don’t moderate.

The Philippine central bank uses the TDF and BSP bills to mop up excess liquidity in the financial system and better guide market yields towards its policy rate.

In its latest Monetary Policy Report, the central bank said it has limited its TDF offerings to a single tenor to rationalize liquidity operations and focus on tenors that would boost monetary policy transmission.

As of mid-February, the BSP’s market operations have absorbed P1.2 trillion in excess liquidity from the market, with 9% of this being siphoned off via the term deposit facility. — Aaron Michael C. Sy