The International Monetary Fund (IMF) is recommending closer coordination between the Bangko Sentral ng Pilipinas (BSP) and the Bureau of the Treasury (BTr) for the creation of a more transparent and credible benchmark yield curve.
In a December 2023 IMF Country Report based on its Article IV Consultation last November, the IMF included in its assessment that closer discussion between BSP and the BTr on reforms to “further develop the yield curve would be helpful.”
“The main issue facing the short-end of the curve is a large discrepancy between yields on BSP bills and Treasury bills. This discrepancy has created challenges for the banking sector in pricing debt instruments accurately, with the Bloomberg valuation tool (BVAL) relying exclusively on government bond yields and banks starting to use the RRP rate explicitly for pricing working capital loans,” according to the IMF.
It added that a “smooth yield curve” will encourage the development of a derivatives market for hedging purposes.
“To harmonize the two markets, the BTr should refrain from keeping supply at the short end artificially low by transitioning to a price-taker model during bond auctions. Reducing the number of individual bond series on offer and consolidating maturities into a reduced number of benchmark bonds would help concentrate trading activity,” the IMF noted in its assessment.
Further, it said the BSP and the BTr could do more work together to improving the securities market.
“Another area for coordination is the type of approved participants in each market as the current exclusion of non-banks from the BSP bill market is a major driver of the observed yield discrepancy,” it said.
Meanwhile, the IMF said “other issues in the two markets, such as the obligations and performance of primary dealers including market-making and facilitating the use of repos of government securities, should also be addressed.”
The BSP has said that it is on track to creating a credible and reliable benchmark yield curve that is market-determined.
The BSP is targeting to have a credible yield curve that is tenor-based, transactable and transparent by early next year.
Basically, the BSP wants to develop a benchmark for the government securities market and to do this, they have to increase the market volume, such as on the 5- and 10-year tenors to get to a benchmark that is market-derived and not model-derived.
This means the so-called market makers would have to be able to quote bid and offer spreads. A market-maker trades securities and other instruments and create a market for it by providing liquidity.
At the moment, these market-makers which are mostly banks, have their “hands tied” because there are not enough liquidity or volume to auction securities in the market.
This is where the BSP has to develop the reverse repurchase agreement facility or repo market.
In other countries, for the repo market to function, market-makers would include institutions that have holdings of government securities such as pension funds, insurance companies, among others.
If there is enough liquidity or volume in the market, there will be trading, benchmarks will be created and the bid-offer spreads will narrow by about five to 10 basis points.