Term deposits yield up anew

MANILA, Philippines – The yield of longer-dated term deposits rose yesterday as the Bangko Sentral ng Pilipinas (BSP) continued to mop up excess liquidity in the financial system.

The 28-day term deposits fetched a rate of 2.5584 percent, higher than last week’s 2.5551. The accepted yield ranged between 2.5 and 2.5625 percent.

On the other hand, the yield of the seven-day term deposits remained unchanged at 2.5 percent.

“As we migrate overnight funds into the seven-day and 28-day placements, we see the beginning of a modestly upward path of interest rates for longer maturities,” BSP Deputy Governor Diwa Guinigundo said.

Bids for the seven-day term deposits reached P35.03 billion, while tenders for the 28-day term deposits amounted to P196.91 billion. The central bank made a full award of P10 billion for the seven-day term deposits and P100 billion for the 28-day term deposits.

Guinigundo pointed out the objective of the shift to the interest rate corridor (IRC) system that included the launch of the term deposit facility (TDF) last June 8 is slowly being achieved.

“We continue to see the expected result from the TDF as an active open market instrument. We mop up excess liquidity resulting in the decrease in the bid to coverage ratio,” he added.

Term deposits are common tools used by central banks for liquidity management. It allows central banks to withdraw bulk of excess liquidity from the financial system.

From an original volume of P30 billion, the volume of the TDF was raised to P50 billion in July, to P70 billion last Aug. 3, to P90 billion last Aug. 31, and to P110 billion starting Oct. 5.

With the shift to the IRC framework last June 3, authorities made an operational adjustment slashing key policy rates. The rate for the overnight lending facility was set at 3.5 percent instead of six percent, the overnight reverse repurchase rate was set at three percent instead of four percent, and the overnight deposit facility was retained at 2.5 percent.

The interest rates for the overnight lending and deposit facilities form the upper and lower bound of the corridor while the overnight reverse repurchase is set at the middle of the corridor.

“BSP policy rate continues to provide the guidance to market rates and considering that inflation rate is moving closer to the target and talks about the impending US Fed normalization remain live, the trajectory even for interbank rates is indeed moving towards the policy rate,” he said.