TDF auction results show market forces at play

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THE results of the term deposit facility (TDF) auction on Wednesday reflect the market forces at play, with bidders pricing in the likelihood of an interest rate hike by US Federal Reserve and pushing the auction’s interest rates beyond 2.5 percent.

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The market’s familiarity with the Interest Rate Corridor (IRC), was in line with expectations that rates will be stirred toward the Bangko Sentral ng Pilipinas (BSP) policy rate, according to the central bank.

But an economist from a banking giant belittled the auction results, particularly the higher yield rate, noting the BSP may simply have to increase the weekly volume offering to reflect the IRC’s impact on the central bank’s liquidity-mopping operations.

“Under the IRC, the BSP in general would be accepting all the bids until we have filled the offered volume for the TDF,” BSP Governor Amando Tetangco Jr. told reporters in a text message.

The BSP awarded P90 billion during Wednesday’s auction—P10 billion in the seven-day TDF and P80 billion in the 28-day tenor. At the same time, it rejected most of the P230 billion of bids.

“We’ve calibrated the auction sizes so that market rate movements that will close the gap with our policy rate would also be gradual,” Tetangco noted.

At present, the BSP’s reverse repurchase (RRP) facility rate is at 3.0 percent. The rate for overnight lending is at 3.5 percent, and 2.5 percent for deposit facilities.

The BSP noted the bid-to-cover ratio of the auction has been declining gradually, particularly the on the 28-day TDF.

The bid-to-cover ratio compares the number of total bids with the bids deemed acceptable. The higher the ratio, the more the auction is considered oversubscribed.

The bid-to-cover ratio for the 28-day TDF declined to 2.396 percent on August 31, from 2.53 percent on August 24 and 5.86 percent on June 8.

Tetangco said the decline “reflects greater market familiarity with the operational aspect of IRC.”

“Moreover, it also shows the continued absorption of liquidity via the TDF. We will still continue to assess market conditions to see what further refinements to the auction size for both tenors would be needed going forward,” he said.

BSP Deputy Governor Diwa Guinigundo said the higher yield rate is in line with central bank expectations that absorbing liquidity from the financial system and migrate funds from overnight deposit to TDF would lead market rates toward the BSP policy rate and enhance the effectiveness of monetary policy.

The interest rate for the 28-day tenor rose to 2.512 percent from 2.501 percent last week.

“Market players are trying to push up short-term rates in anticipation of a Fed policy rate hike in September or December,” said University of Asia and the Pacific economist Dr. Victor Abola.

He said the higher short-term rate has no impact on BSP’s policy setting as it is practically still at the floor of the interest rate corridor.

HSBC economist Joseph Incalcaterra said the higher yield rate was a small sign that the larger volume of the TDF is starting to have some effect on the outcome of the auction.

“However, given the extremely marginal increase in yield, there is still a long way to go and the BSP will need to continue increasing the auction volumes in order for the new policy framework to have more of an impact,” he suggested.

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