Confused, bothered and bewildered
The Philippines being a predominantly Roman Catholic nation places importance on September 8 that this day of every year is a special working holiday in commemoration of the Feast of the Nativity of the Blessed Virgin Mary.
For the market players, September 8 is also an important date because it signifies the virtual rebirth of the interest rate swap market as it marked the first day when the Bangko Sentral ng Pilipinas (BSP) begins the shift to a variable-rate format with a pre-determined offer volume in the overnight reverse repurchase (RRP) auction.
This was nine weeks after LIBOR internment and the corresponding demise of PhiRef (Philippine Interbank Reference Rate) that resulted to a lackluster appetite for interest rate swap facility. To put it more bluntly the interest rate swap market hangs in suspension.
To put things in its right perspective, the BSP’s overnight rate of 6.25 percent. This is the base rate.
The market was upbeat that on first auction day total tenders hit P408.309 billion, over 25 percent of the volume offering at P320 billion. It was fully awarded but at a rate of 6.295 percent, which is slightly higher than the policy rate.
As a result, the market's optimistic mode changed altogether because there was lack of clarity on the awards and the rates. There was an offer rate of 6.12 percent, which I was told was disregarded and the auction committee awarded at 6.29 percent.
In the succeeding auction, there was a reversal with the offered rate of 6.24 percent, definitely lower than the base rate of 6.25 percent. This time, the BSP increased to P400 billion but instead of awarding in full, it was under award with the rate capped at 6.225 percent. From what I’ve gathered, there was an offer of 6.221 percent.
This created confusion. The market right now is confused, bothered and bewildered (I was enthralled using the last two words, bothered and bewildered, from the 1957 film Bewitched, Bothered and Bewildered) to aptly describe the prevailing sentiment about the RRP auction.
There was pretty much a lack of transparency. Based on the auction pattern, the prevailing rate will no longer be held true the next auction. As I understood it, in executing this shift, the BSP explained that such will “signal its monetary stance through the target RRP rate.”
The reading, though, is the RRP rate swings like a pendulum.
From what I gathered, at one point in an auction, a bidder offered a rate of slightly lower than the one accepted. No matter the difference whether it's a mere, skimpy .001 basis point, isn’t it better for an issuer to award at a lower rate? Or was the tender rate considered an outlier? In statistics, outlier is a data point that differs significantly from other, far removed from the mass of data?
The market is in a quandary, perplexed, even! Yes, Virginia, they’re confused, bothered and bewildered. "We're being blinded left and right. The lower rate today is not accepted the following day,” laments a treasurer of a universal bank.
As the RRP auction churns on a daily basis, ‘am pretty sure the bank treasurers are wanting to know parameters of the award; transparency on under award, and what classifies as an outlier. These specificities have to be disclosed in order to avoid misconceptions and misinterpretations.
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