Short-term BSP securities urged

Published September 28, 2020, 5:00 AM

by Lee C. Chipongian

Banks prefer Bangko Sentral ng Pilipinas (BSP) securities with short-term maturities of up to two months, according to its highest-ranking official.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno ( Bloomberg file photo)

BSP Governor Benjamin E. Diokno said that based on the results of the market sounding exercises conducted by the BSP, banks have shown “strong market preference for tenors within the rates of up to two months.”

 Part of proposed tenors for the BSP securities, both bills and bonds, was for a term of one year which is the tenor that the BSP and the Bureau of the Treasury have previously agreed on as a compromise.

On September 18, the central bank issued its first 1-month or 28-day BSP Bills after it restored its authority to sell securities last year with Republic Act No. 11211 or the amended BSP Charter.

The auction of BSP term deposit facility (TDF), offered in 7-day, 14-day and 28-day tenors will continue to complement the securities facility.

The 28-day BSP Bills, in the meantime, were priced closed to the 28-day TDF rate. Usually, central bank securities are offered with the shorter segment of the yield curve while bonds have longer maturities. It is also important that BSP securities will not overlap with BTr-issued government securities. The BTr offers tenors in 91-day, 182-day and 364-day securities.

Diokno said the results of the initial September 18 auction were consistent with market expectations of strong demand prior to the bidding auction as the market remains liquid.

 The BSP has no intention of cancelling the TDF tenors, added Diokno. “The issuance of BSP securities does not imply the BSP’s TDF will be phased out. The TDF shall remain in the BSP toolkit and shall be used as a fine tuning instrument along with the RRP (reverse repurchase) facility which may be used to deal with short term fluctuations in the system liquidity,” he said.

“Currently, the BSP is offering the 28-day TDF and 28-day BSP securities side by side to facilitate liquidity management operations and to accommodate excess liquidity from eligible participating entities who are not yet able to access the BSP securities facility while still completing requirements for participation,” Diokno added.

The central bank will continue to issue 28-day BSP Bills since the market prefers shorter tenors. “The offer size will be relatively small at the initial phase but it will be gradually adjusted depending on market response and prevailing liquidity conditions,” he also said.

 On Friday, the second week of the 28-day BSP Bills auction, the tenders continue to outnumber the offer of P30 billion which was higher than the maiden issue last week of P20 billion. Bids amounted to P69 billion with a weighted average accepted yield of 1.8423 percent, up from 1.8355 percent on September 18.

 BSP Deputy Governor Francisco G. Dakila Jr. noted that tenders were 2.3 times the offer volume and the yield went up by 0.68 basis point.

Dakila said the auction “show strong market interest” for the BSP securities “amid ample liquidity in the financial system.” He said the accepted yields “remained comparably close to that of the 28-day TDF in Wednesday’s auction.”

“The BSP will continue to gradually adjust the volume in the issuance of its securities consistent with the overall monetary operations and liquidity assessments,” said Dakila.

Diokno, during his regular “GBED Talks” with the press last Thursday, said the issuance of its own securities gives them more flexibility in managing liquidity as it shifts to a more market-based monetary operations.

“The issuance of bills and bonds is an additional tool that will further enhance BSP’s implementation of monetary policy. This also aligns the BSP’s conduct of monetary operations with international central banking practice,” said Diokno.

The securities with the other BSP instruments will “bridge” the policy rate and the rest of the yield curve. “The BSP securities issuance will help in guiding market interest rates along the short end of the yield curve. This strengthens the transmission of BSP’s monetary policy stance to the rest of the economy,” said the BSP chief.