Banks bid up short-term yields amid rate hike threats

Local banks continued to demand higher yields in return for parking their idle cash in the central bank’s vaults amid expectations authorities would hike rates later this month in response to August’s record high inflation.

During Wednesday’s term deposit facility auction, financial institutions continued to push interest rates higher, continuing a trend that began after the Bangko Sentral ng Pilipinas (BSP) implemented a 50-basis point rate hike last month—its most aggressive tightening move in a decade.

The yield on the seven-day term deposit facility (TDF) rose to 4.3744 percent from the previous week’s 4.3218 percent. Banks tendered only P38 billion worth of bids for the P40 billion on offer, with the central bank accepting the entire block.

“The market now expects the BSP to hike rates later this month, either by 25 or 50 basis points, so they are pushing up the yields on the TDFs, too,” said one bank treasurer, who also noted financial institutions were more likely to be aggressive in bidding for short-dated securities rather than long-dated ones because of the expected rate hike in two weeks.

Last week, the government announced inflation rate for August hit 6.4 percent—the highest in almost 10 years—due to the continued increase of international crude oil prices and the rice shortage domestically.

Meanwhile, the central bank’s 14-day term deposit instrument also saw a hike in its yield to 4.4224 percent on Wednesday from the previous week’s 4.4123 percent. Banks submitted P44.9 billion in bids for the P40 billion on offer, with authorities making a full award of P40 billion.

Finally, the yield on the 28-day term deposit facility rose to 4.4824 percent from the previous week’s 4.4515 percent. Banks tendered only P10.1 billion worth of bids for the P20 billion on auction, with the central bank accepting P9.6 billion.

All told, financial institutions submitted P93 billion in bids for the P100 billion that the central bank attempts to “sterilize” from the financial system each week in a bid to cap the inflation rate. Of this amount, P87.6 billion was accepted.

Espenilla told reporters last week authorities would carefully weigh the need for another rate hike after poring over the latest inflation data.