The Bangko Sentral ng Pilipinas (BSP) is on track to creating a credible and reliable benchmark yield curve that is market-determined, according to officials.

In a press briefing on Wednesday, Sept. 6, BSP Senior Assistant Governor Maria Ramona Gertrudes T. Santiago said the “ultimate objective (is to) to have a market-determined benchmark for yield curve.”

The BSP is targeting to have a credible yield curve that is tenor-based, transactable and transparent, by the end of 2023 or early next year.

Santiago said 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.

“To achieve that, the so-called market makers have to be able to quote bid and offer spreads,” she told reporters. 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 a more market-influenced reverse repurchase (RRP) facility or repo market. The recent changes to the RRP facility and the start of a variable-rate RRP auction this month to get an overnight RRP rate will help develop a yield curve over time. 

Ideally, Santiago said that 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, said Santiago.

In a previous talk with media, BSP Governor Eli M. Remolona has said that in their discussions with the banks, the BSP has committed to be “more serious” as the market-maker of last resort.

As the BSP helps banks develop a credible yield curve for two maturities, Remolona said they will fulfill their role as market-maker as well. A workable yield curve represents liquidity at different maturities and that it should “fit a yield curve to yields” to be able to “have something you can rely on.”

He said for now, market-makers or the banks are not really doing much market-making.

Remolona said banks are voluntary market-makers.

The BSP and the Bankers Association of the Philippines (BAP) have agreed to work together to deepen the repo market and later find a yield curve.

Based on initial talks with BAP, the banks have committed to do more serious market making for the 5- and 10-year maturities.

Remolona said at this point, the 5-year yield is unknown or not determined, and they would want to close the gap between the bid and ask quotations. However, banks have “promised” to discover a credible yield curve for at least two maturities “from across a whole range of maturities”.