This mainstream article wants to show that current market stress at Philippine treasury markets has been about clashing policies between the Philippine government and the central bank, Bangko Sentral ng Pilipinas (with emphasis on the latter)
From Bloomberg:
The Philippine central bank’s plan to auction term deposits is coming at the worst possible time for a government reeling from surprisingly bad economic growth data.The weekly sales, aimed at soaking up excess cash that could spur investments in risky assets, will allow lenders to compete for a fixed volume of deposit access to Bangko Sentral ng Pilipinas. BDO Unibank Inc., the country’s biggest lender, sees them helping to push up the secondary-market yield on three-month government bills to as high as 3.25 percent by year-end, from 2.46 percent on Monday.Rising borrowing costs may make it harder for President Benigno Aquino to revive an economy where growth slowed to a three-year low of 5.2 percent in the first quarter. The International Monetary Fund said the “significant negative surprise” would force it to review its expansion forecasts, even as it predicted a pickup in exports and public spending.
So what this article attempts to show has been rising yields has been the result of BSP actions.
And such action has supposedly been meant to align market rates with policy rates.
More…
While the Philippine benchmark interest rate was raised from a record-low 3.5 percent last year to 4 percent currently, market rates have yet to catch up. The one-month bill used as a benchmark for pricing bonds and preferred shares was showing a yield of 1.96 percent on Monday, according to data from the Philippine Dealing & Exchange Corp.
The reason I show the 1 month bill's two month chart above is to expose on how media fudged on the statement that “market rates have yet to catch up” by pointing at yesterday’s 1 month bill ONLY!
The article has been partly accurate to report of the June 1 1.96% rate, but apparently the article forgot to mention that the same yield (one month treasury bills) hit a HIGH of 3.721% on May 21, 2015 or just two weeks back!
And from May 15 to May 26 yield of 1 month bill has traded at over 3.5%!
Additionally, 1 month treasuries have become very volatile since April when there has been NO talk of “soaking up excess cash”.
So the notion that “market rates have yet to catch up” appears misleading. It is true with reference to the date of reporting. But it is false in a general sense because rates have already caught up with policies...until last week.
So media here applies data mining or selective perception.
So media here applies data mining or selective perception.
The article goes on to insinuate that BSP tightening has been about macroprudential policies:
Manila is in the midst of a building boom that will add a record number of apartments over the next two years. Policy makers introduced measures in 2014 including capping the collateral value of mortgages at 60 percent amid concern prices were rising too fast. Property loans by Philippine banks rose 6.8 percent in the fourth quarter, accelerating from 4.5 percent in the previous three months, central bank data show.The monetary authority wants to soak up excess cash so that movements in the benchmark interest rate will more effectively convey policy to the market and interest rates will move closer to it, Deputy Governor Diwa Guinigundo said in April, when he unveiled plans to offer term deposits with tenors from one month to a year.
First of all, the article didn’t mention WHY BSP wants to soak up cash to “effectively convey policy to the market and interest rates”.
The article’s seeming objective has been to project rising coupon yields as consequence of BSP actions rather than from market forces.
But the chart above tells you that this has hardly been accurate. Rates have been rising even PRIOR to yesterday’s article!
And going back to the why, has BSP’s purported desire to “tighten” been because of a credit boom?
Well while it is true that banking loans still sizzles at 10% growth rate, it has been shrinking. And the notable slowdown of bank credit growth has been broad based and not limited to some sectors.
And the broad based slowdown in credit growth has equally been reflected on M3 growth and CPI inflation.
So the cumulative developments in bank credit, money supply and CPI have been indicative of tightening—a mainly market based tightening
Second, the article didn’t mention that the BSP in 2014 has already been engaged in a series of partial tightening moves, in particular raised policy rates, SDA rates, reserve requirements, ordered hike in the banking system’s capital and stress tests.
All these added to eight measures going to October.
Third, contra the idea that present BSP actions wants to soak up liquidity, other press release say otherwise: (Philstar May 29 2015) “The BSP continues to see monetary policy as appropriate given the continued growth in the economy and the good prospects for the rest of the year,” Tetangco said in a text message to reporters.
In fact in recent (February) speeches, the BSP governor has floated the risks of deflation. Yet the de facto central bank standard in approaching “risks of deflation” translates to more easing.
So what could be possible explanation of the conflict here? Has media misinterpreted the BSP or has media misrepresented the BSP, or has there been a mix up in the BSP official communications or could the BSP be deliberately confusing the public?
Besides to suggest higher rates have been a product of BSP actions means that the BSP has been soaking up cash since NOVEMBER…
…that’s because yields from 1 month to 3 years have been ascendant from November through April (or until those interventions appeared)!
But due to some unseen or undefined circumstances the same yields have been violently forced down!
A better way to look at such dynamic should be through the yield curve.
What does the yield curve say?
Relative to the 1 month yield they have been FLATTENING.
And NOT only have they been flattening, there have been recent instances of major INVERSIONS!
That inversion caused somebody to aggressively intervene to drop 1 month yields. Who could they be?
And it’s not just the 1 month, this applies to the entire spectrum!
Since late November yields have generally been flattening. But because a flattening will signify as bad news for G-R-O-W-T-H somebody decided to force a sharp steepening (red rectangle)!
So here is my frame of the current developments:
The flattening yield curve has partly been the outcome of BSP’s March to October’s tightening. However, more substantially, they have come to signify the system’s growing balance sheet problems that are being ventilated on Philippine treasury markets! Yield curve flattening has been a long time process, it's only now where we see an acceleration or intensification.
And because current developments in Philippine treasuries doesn’t speak well of the heath of the credit system there has been an onslaught of interventions from faceless entities to manage the yield curve.
Now rising yields are being rationalized by media to deflect on the real issue.
Yet the charts above reveals of the seeming egregious publicity disinformation stint to misrepresent current conditions in the treasury markets by media!
Second, the article didn’t mention that the BSP in 2014 has already been engaged in a series of partial tightening moves, in particular raised policy rates, SDA rates, reserve requirements, ordered hike in the banking system’s capital and stress tests.
All these added to eight measures going to October.
Third, contra the idea that present BSP actions wants to soak up liquidity, other press release say otherwise: (Philstar May 29 2015) “The BSP continues to see monetary policy as appropriate given the continued growth in the economy and the good prospects for the rest of the year,” Tetangco said in a text message to reporters.
In fact in recent (February) speeches, the BSP governor has floated the risks of deflation. Yet the de facto central bank standard in approaching “risks of deflation” translates to more easing.
So what could be possible explanation of the conflict here? Has media misinterpreted the BSP or has media misrepresented the BSP, or has there been a mix up in the BSP official communications or could the BSP be deliberately confusing the public?
Besides to suggest higher rates have been a product of BSP actions means that the BSP has been soaking up cash since NOVEMBER…
…that’s because yields from 1 month to 3 years have been ascendant from November through April (or until those interventions appeared)!
But due to some unseen or undefined circumstances the same yields have been violently forced down!
A better way to look at such dynamic should be through the yield curve.
What does the yield curve say?
Relative to the 1 month yield they have been FLATTENING.
And NOT only have they been flattening, there have been recent instances of major INVERSIONS!
That inversion caused somebody to aggressively intervene to drop 1 month yields. Who could they be?
And it’s not just the 1 month, this applies to the entire spectrum!
Since late November yields have generally been flattening. But because a flattening will signify as bad news for G-R-O-W-T-H somebody decided to force a sharp steepening (red rectangle)!
So here is my frame of the current developments:
The flattening yield curve has partly been the outcome of BSP’s March to October’s tightening. However, more substantially, they have come to signify the system’s growing balance sheet problems that are being ventilated on Philippine treasury markets! Yield curve flattening has been a long time process, it's only now where we see an acceleration or intensification.
And because current developments in Philippine treasuries doesn’t speak well of the heath of the credit system there has been an onslaught of interventions from faceless entities to manage the yield curve.
Now rising yields are being rationalized by media to deflect on the real issue.
Yet the charts above reveals of the seeming egregious publicity disinformation stint to misrepresent current conditions in the treasury markets by media!
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