Philippine Central Bank’s Maiden Bond Offer Set for Next Week

(Bloomberg) -- The Philippine central bank will begin selling its own securities next week, a new instrument that it said will become its main tool to control liquidity in the financial system.

Bangko Sentral ng Pilipinas will offer 20 billion pesos ($411 million) of 28-day bills on Sept. 18, Governor Benjamin Diokno said on Twitter on Wednesday.

“The BSP securities, over time, shall be considered the BSP’s main liquidity tool for locking in structural liquidity surplus,” the central bank said in an emailed reply to questions on Tuesday.

The sale of the securities, which was allowed under the central bank charter approved last year, will better guide bond yields and improve loan pricing, BSP said. The bond sale comes at a time when government debt yields are starting to rise and amid slower money supply growth.

“Market will look at the size of the offering and get its cues from there,” said Paul Raymond Favila, head of markets and securities services at Citigroup Inc. in Manila. “If there is a sense that BSP is starting an unwind, then you will see a fair reaction.”

Toolkit

At present, Bangko Sentral uses a host of tools including short-term deposits and reserve requirement ratios to manage money supply. The BSP securities can be traded in the secondary market, according to a central bank circular released Wednesday.

“With its own bond, it can better anchor market interest rates to the policy rate if there are significant misalignments in liquidity,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “In the past, excess liquidity has made it more challenging for the central bank to guide interest rates when government bond yields diverged from the policy rate.”

The central bank also said it will continue to buy government bonds in the secondary market for as long as needed. The program will be integrated into its monetary operations, it said.

Here’s what the BSP said about the bond sale and the impact on liquidity management:

• The BSP will also sell bonds, though initially, only bills will be offered given market preference for shorter tenors
• The BSP plans to auction securities weekly, or as necessary depending on demand and liquidity. The BSP will publish a quarterly indicative issuance schedule
• One of the key functions of BSP securities is to help guide market interest rates along the short end of the yield curve. Short-term BSP instruments such as the term deposit facility and the BSP securities provide a bridge between key policy rate and the rest of the yield curve, which can also guide banks in pricing loans
• The term deposit facility shall remain in the toolkit, along with the overnight reverse repurchase facility

©2020 Bloomberg L.P.