The central bank is working on establishing a credible yield curve that is tenor-based, transactable and transparent by January 2024, about six months, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona.

Remolona, who became BSP's seventh governor on July 3, said he will adopt and continue former BSP chief, Felipe M. Medalla’s fighting target to have in place a reliable yield curve by early next year.

“It’s an ongoing conversation with the banks. We don’t want to just impose something on them so there’s discussion going on between us and the traders of the banks,” Remolona told Bloomberg TV over the weekend. He was in Toronto, Canada for a Philippine Economic Briefing last week.

Remolona said the BSP is bent on establishing a “more reliable” yield curve which will help deepen the domestic capital markets and provide yields for different tenors.

“Right now, there’s a workable yield curve. We want it to be a yield curve that represents liquidity at different maturities. We’re talking to the banks about market-making (and) to make sure there’s liquidity around the two-year and five-year (tenors) so that when we fit a yield curve to yields, we have something you can rely on,” said Remolona. “(This) also gives us an extra mechanism for the transmission of monetary policy,” he added.

The BSP has published its first overnight (ON) reference rate on July 5 to replace the London Interbank Offered Rate (LIBOR). The new rate is based on the secondary market rate of the 28-day BSP bill and its ON equivalent.

The ON rate enhances the BSP’s ON reverse repurchase (RRP) agreement facility. Once the enhancements are fully completed, the new rate from the RRP facility will become the ON reference rate, said the BSP.

Meanwhile, the BSP has started to accept all overnight RRP bids since July 14 via auction as it transitions from a fixed-rate fixed-volume to a fixed-rate full-allotment auction, and later to a variable-rate auction.

The RRP facility is part of BSP’s monetary operations to manage the amount of money circulating in the economy to achieve its inflation target. They do this by selling government securities with a commitment to buy them back at a later date.
The RRP is a liquidity-absorbing operation. The main tool is the ON RRP facility which is based on the BSP policy rate, said the BSP.

The BSP considers it urgent to have a credible yield curve as soon as possible. Ex-BSP chief, Medalla, has said that since macro-financial decisions are based on these benchmark risk prices, having a reliable yield curve is best for the market.

Medalla, who retired last July 2, said a credible yield curve should come from active trading for various tenors and "make these yields usable to all parties and can be replicated as needed."