July 13, 2022

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Term deposit yields slip amid US recession fears

YIELDS on the central bank’s term deposits inched down on Wednesday as expectations of a recession in the United States caused oil prices to decline.

The term deposit facility (TDF) of the Bangko Sentral ng Pilipinas (BSP) attracted bids amounting to P385.602 billion on Wednesday, well above the P330-billion offering but declining from the P479.514 billion seen a week ago.

Broken down, tenders for the seven-day papers reached P204.109 billion, higher than the P160 billion auctioned off by the central bank but failing to beat the P232.213 billion in bids seen the previous week.

Banks asked for yields ranging from 2.64% to 2.71%, narrower than the 2.58% to 2.725% band seen a week ago. This caused the average rate of the one-week deposits to decrease by 0.99 basis point (bp) to 2.6838% from 2.6937% previously.

Meanwhile, bids for the 14-day term deposits amounted to P181.493 billion, above the P170-billion offering but down from the P247.301 billion in tenders seen on July 6.

Accepted rates for the tenor were from 2.625% to 2.75%, inching lower than the 2.6253% to 2.7588% margin seen a week ago. With this, the average rate for the two-week deposits slipped by 0.64 bp to 2.7235% from 2.7299% logged in the previous week’s auction.

The term deposits and the 28-day bills are used by the BSP to mop up excess liquidity in the financial system and to better guide market rates.

The BSP has not auctioned 28-day term deposits for more than a year to give way to its weekly offerings of securities with the same tenor.

“The results of the TDF auction show that liquidity in the financial system remains ample. Looking ahead, the BSP’s monetary operations will continue to be guided by its assessment of the latest liquidity conditions and market developments,” BSP Deputy Governor Francisco G. Dakila, Jr. said in a statement on Wednesday.

Meanwhile, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message that term deposit yields were marginally lower on Wednesday as signs of a possible recession in the US “led to downward correction in the prices of global oil to three-month lows and also lower prices of other commodities, as well as the easing of US Treasury yields.”

Oil prices and bond yields dipped on Tuesday as traders fretted over prospects of further central bank tightening and worries about the health of economies worldwide, Reuters reported.

The yield on 10-year Treasury notes was down 3.1 basis points to 2.96%, having dropped back below 3% overnight as investors bought safe-haven Treasuries amid a sell-off on Wall Street.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 3.1 basis points at 3.039%.

Growth fears were weighing on oil, despite concerns about tight supply. Oil prices fell sharply on Tuesday, pressured by the strong dollar, demand-sapping COVID-19 curbs in top crude importer China, and fears of a global economic slowdown.

On Wednesday, the US benchmark 10-year yield was 2.9724%, having traded either side of 3% for the last week.

Oil prices paused their overnight declines. Brent crude was little changed at $99.60 a barrel with US West Texas Intermediate crude at $95.89.

TDF yields also dropped despite the weakening peso and expectations of a rate hike by the BSP next month.

The peso rebounded on Wednesday, closing at P56.26 per dollar, rising by 11 centavos from its P56.37 finish on Tuesday, which was a near 18-year low.

Still, year to date, the local unit has weakened by 10.31% or by P5.26 from its close of P51 versus the dollar on Dec. 31, 2021.

BSP Governor Felipe M. Medalla last week said the central bank is prepared to raise benchmark rates by 50 bps at their Aug. 18 meeting to keep inflation in check after the peso on Thursday breached the P56 level against the dollar for the first time in more than 17 years.

He said the US central bank’s hawkish stance has placed “strong depreciation pressures” on global currencies such as the peso, which adds to inflation risks.

The Monetary Board has raised benchmark interest rates by a total of 50 bps so far this year via back-to-back 25-bp hikes at their May 19 and June 23 meetings, bringing the overnight reverse repurchase facility or policy rate to 2.5%.

A 50-bp hike at the August meeting will bring the BSP’s key rate to 3%. Mr. Medalla also said last week that the central bank may need to raise borrowing costs by at least 100 bps more this year to bring the policy rate higher than the midpoint of its 2-4% inflation target.

Headline inflation reached 6.1% in June, the fastest in nearly four years. This brought the first-half average to 4.4%, above the central bank’s 2-4% goal but still lower than its 5% forecast for the year. — K.B. Ta-asan with Reuters