Seven-day term deposits twice oversubscribed

BIDS FOR week-long term deposits ballooned to twice the amount of the instruments offered during yesterday’s auction, as banks held more cash by the end of the holiday season.

Demand for the seven- day tenor surged to P95.55 billion on Wednesday, more than double the P40 billion which the Bangko Sentral ng Pilipinas (BSP) placed on the auction block. Total tenders also picked up from the P59.808 billion in offers received the previous week.

The overwhelming bids drove the average yield down to 3.3654% as banks sought returns ranging from 3.25-3.4%. The rate declined from the 3.3995% average fetched during the Dec. 27 exercise.

The term deposit facility ( TDF) is currently the central bank’s main tool in shoring up excess funds in the financial system. The window allows banks to park the extra cash they hold under the BSP in exchange for a small margin, which is determined through weekly bids hosted by the central bank.

Through this, the BSP expects to bring market rates closer to the 3% benchmark borrowing rate, coming from below the 2.5% floor of the interest rate corridor when the TDF auctions started in June 2016.

“After the holidays, liquidity goes back to the banks. They are now more liquid and they need to place their money very quickly,” BSP Deputy Governor Diwa C. Guinigundo said in a text message to explain the sudden spike in demand.

Tighter competition for the limited supply of week-long term deposits thus drove rates down, he added.

The central bank has kept the weekly term deposit auctions limited to the week-long instruments since mid- December, in light of a smaller surplus of cash held by financial players over the holiday season.

The 28-day tenor was last offered on Dec. 13, during which the P40 billion auction volume was met by just P33.005 billion in total demand.

Despite the recovery in bank bids, the central bank decided against offering the month-long tenor next week, although this maturity will likely be revived over the near term.

“We shall restore the 28 days TDF in due time as liquidity normalizes after the holidays and the banks have more regular view of their investment horizon,” Mr. Guinigundo added.

The shorter tenor lends more “flexibility” for banks to manage their funds and service client demands over the Christmas season, when there is greater demand for cash as Filipinos spend more for celebrations and gift-giving activities.

The BSP is in talks with banks as they consider offering a new tenor for term deposits, which would likely be longer than a week but shorter than a month.

Another P40 billion worth of seven-day term deposits will be up for grabs on Wednesday.