Money placed in the high-yielding Special Deposit Account facility of the central bank, Bangko Sentral ng Pilipinas (BSP), reached a new high P546.35 billion as of Feb. 8, as banks dumped low-yield government securities and locked up more of their excess cash in the BSP.

The amount is more than double the P233.65 billion absorbed by the BSP from the banking system via its overnight borrowing facility as of the same date.

Since the rules governing the BSP Special Deposit Accounts (SDAs) were relaxed and improved in May last year, placements of banks have dramatically increased.

"That means that bond rates are irrationally low, that banks sold them off and placed their money in SDAs instead," a foreign banker said.

Bankers said that despite a series of BSP interest rate cuts that also trimmed SDA yields, the SDAs were still much more attractive than any other fixed-income instruments. Some noted that mutual funds with access to SDAs—those affiliated with banks—outperformed other fixed-income securities-based mutual funds in 2007.

Bankers noted a slowdown in SDA placements last November and December due mainly to a yearend window-dressing. They noted that the financial system was still teeming with cash, especially with over $1 billion in monthly remittances from overseas Filipino workers.

"Banks wanted to show more resources in their end-2007 balance sheet, so they pulled some money out of SDAs temporarily," another banker said.

SDAs of varying maturity—from overnight to as long as six months—offer a premium of 1.0-1.5 percentage points over the BSP overnight borrowing rate of 5.00 percent, bankers noted.

Government bonds of the same tenor pale in comparison. In January, for instance, the interest rate on 10-year Treasury bonds was 0.1 percentage point below the SDA rates, allowing banks to reap yields equivalent to long-term investments on short-term placements.

The national government auctioned off at the primary market 10-year T-bonds at an average of 5.88 percent last January. Yields on the 10-year T-bonds issued in 2006 averaged 8.06 percent and those issued in 2005, averaged even much higher at 11.69 percent.

The SDA rules were amended last year as the BSP saw the need for a more powerful tool to check the robust growth in broad money supply, which was then growing by more than 20 percent—the limit set to maintain a benign inflation environment.

Under the new rules, even banks' trust departments and non-bank government corporations may place funds in SDAs. To make the SDAs more attractive, the BSP has made them eligible as compliance with the 50 percent minimum liquidity requirement on banks—the part of deposits and deposit substitutes required to be held in the form of negotiable and transferable securities.