MONEY MARKETS-Philippine bill yields stay low on flush liquidity

* Liquidity flush, keeps bill yields well below policy rate

* Traders eye actions to mop up ample funds

* Banks seek carry by buying medium-term bonds

By Saikat Chatterjee

HONG KONG, March 28 (Reuters) – Philippine six-month bill
yields dipped on Monday and held near record lows as the Manila
interbank market remained flooded with funds, prompting banks to
keep seeking higher yields in the central bank’s special

Bill yields have plunged in the past month, dragging down
short-term swap rates as relatively tepid bank lending in the
country has kept money markets awash in peso liquidity, even
with last week’s central bank rate hike.

The Philippine central bank (BSP) lifted rates last Thursday
by a quarter-point to 4.25 percent, making it the last Asian
central bank to start unwinding the loose policy put in place to
combat the economic hit from the financial crisis.

Yet short-term yields and swap rates have only fallen
further below policy rates.

Six-month T-bill yields dipped a basis point to
1.58 percent, taking them a full 267 basis points below the
overnight borrowing rate for banks and back near the all-time
low of 1.30 percent hit in December.

Local Philippine three-month interbank reference rates
were set at just 1.063 percent on Monday. One-year
swaps were quoted 10 basis points higher at 1.95
percent after hitting a two-month low on Friday.

Traders have said abundant liquidity — due to the lack of
strong bank lending, steady remittances from overseas workers,
strong foreign portfolio inflows and the government keeping bond
supply in check — has kept short-term rates unusually low.

Other factors also were cited, such as local insurance
companies shovelling funds into more liquid 91-day Treasury
bills due to regulations that they need to invest a majority of
funds in government securities.

As a result, commercial banks have flocked to the BSP’s
special deposits that offer yields well above market yields at
the moment, sending the amount of special deposits to record

Traders said the central bank probably did not want
short-term rates to stay so far below official rates for much
longer, suggesting that the BSP may need to intervene in the
market to absorb liquidity and lift bill yields and short-term

Joey Cuyegkeng, an economist at ING Bank in Manila, said the
wide gap between the policy rate and market yields undermines
the credibility of monetary policy.

The BSP recently stepped up its dollar buying intervention
in the currency markets, suggesting a steady inflow of foreign
funds that was contributing to the flush conditions.

“We should see the very short end of the curve stabilise
for now and rise in the medium term,” said Jonathan Ravelas,
chief market strategist at BDO Unibank in Manila.

At the same time, analysts said the government would like to
see a pick up in bank lending, especially for
infrastructure-related projects, and thus probably does not mind
that banks are flush with funds.

The drop in short-term yields and rates has also prompted
local banks to hunt for higher yields further out the curve,
causing a bull flattening.

Five-year yields were down 4 basis points at 5.97
percent and have plunged about 60 basis points in the past month
as banks have sought higher yields.

Typically when a central bank begins lifting rates, it
causes short-term rates to rise faster than long-term ones in a
bear flattening of the curve.

The short end of the Philippine bond curve has been
unusually volatile in the past six months.

The BSP sparked a dollar shortage in October when it
temporarily stopped rolling over its forward book, causing a
flood of peso liquidity then that drove down bill and deposit

But in January worries about inflation and profit-taking
drove yields sharply higher.

(Additional reporting by Jong-woo Cheon in Singapore; Editing
by Eric Burroughs)

MONEY MARKETS-Philippine bill yields stay low on flush liquidity