Yields on longer term T-bills seen to rise

Yields on the 182-day and 364-day Treasury bills could rise tomorrow, while the 91-day bellwether rate will continue to correct, according to Bangko Sentral ng Pilipinas Governor Rafael B. Buenaventura.

Buenaventura noted that market sentiment is for a continued increase for the 182- and 364-day T-bill rates because of the higher-than-expected budget deficit for this year.

He warned that if the worst case scenario for the deficit materializes, which is a P126.5 billion deficit this year, interest rates are bound to rise.

He said that if the National Government "has to borrow that kind of money, the effect would be higher interest rates."

However, Buenaventura assured that the government is still looking at achieving a budget deficit of P110 billion this year.

If the government is able to keep the deficit at around P110 billion, Buenaventura said the outlook would be much better and the market could see a further softening of interest rates. Government is trying its best to bring down interest rates.

Last Friday the Monetary Board of the BSP decided to reduce by another 50 basis points the key overnight borrowing and lending rates.

Thus, in just two weeks, the BSP has brought down its key overnight borrowing and lending rates by a full one percentage point.

The overnight borrowing rate, which takes effect tomorrow is now down to 14 percent, while the overnight lending rate is down to 16.25 percent.

The BSP was forced to raise its key overnight rates a couple of weeks ago when the peso fell sharply, almost hitting P52 to a dollar.

At that time, the BSP said it raised its key overnight rates as a precautionary move to offset a possible rise in inflation.

However, the stabilization of the foreign exchange situation and the subsequent downward trend in the T-bill market has convinced the BSP that it is now safe to reduce its key overnight rates.

Aside from signalling to the market that interest rates should now decline, the BSP also wants to avoid the higher cost it incurs for overnight placements of banks.

The BSP is carefully calibrating the reduction in overnight rates because of the recent increase inflation which climbed to six percent in November.