The reactivation of the peso interest rate swaps (Peso IRS) is already driving the trading markets to be more active and should establish a government yield curve soon, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr.

Interest rate swaps are a derivative. “That market has become more active, and that will form a yield curve, and we hope the government yield curve –the curve based on government securities –will converge with the interest rate swaps curve,” said Remolona in a recent briefing.

The BSP and the Bankers Association of the Philippines (BAP) revived the IRS market on Nov. 18, 2024. Remolona is hoping that the creation of a benchmark yield curve through the Peso IRS and the enhanced repo market will not only deepen the capital market by boosting trading, but also provide more liquidity in the local bond or securities market.

“We're trying to deepen the capital market, and we're trying to do it through the backdoor. When I say the backdoor, I mean we're trying to make our bond market more liquid. We have a very illiquid secondary market in bonds, especially government bonds, so it's easy,” he said.

The BSP chief added that “options are working, but once they're sold, they don't trade, or they are hard to trade, which means it's harder for our policy rates, our forward guidance to be reflected in the yield curve. What the backdoor approach means is we're trying to do it through interest rate swaps, and that mechanism has started to work.”

The BSP copied this strategy from Europe when they switched to a common currency. “The bond markets in Europe, the one in Deutsche Marks, the Bund, and then you have the French Oats, and you have the Italian bond market. They kind of formed a fragmented market, so the whole economy of the Eurozone converged into a swaps market that became the basis for the European curve, even today. Even today, the benchmark curve in Europe is the interest rate swaps curve,” said Remolona.

The BAP and the central bank are trying to do the same thing, he said. “The banks have been very helpful in this regard, and trading has started to become active in the interest rate swaps curve,” he added.

Meanwhile, the benchmark curve the IRS market will create will help banks and other lenders to price loans at various maturities as well as provide the liquidity investors need.

There are 16 banks acting as market makers for the Philippine Overnight Reference Rate (ORR)-based IRS. The ORR is based on the variable overnight reverse repurchase rate (RRP) of the BSP.