"We were dumbfounded," said National Treasurer Sergio Edeza. "We were expecting close to six percent but this is pleasantly surprising. There is so much liquidity in the market."
The Bureau of Treasury said the rate for the 182-day T-bills also fell to a fresh all-time low of 6.217 percent, or 86.9 basis points lower than the previous week’s 7.086 percent.
According to Edeza, the continued drop could be attributed to the Bangko Sentral ng Pilipinas’ (BSP) decision to tier overnight rates as well as the cut in the BSP’s policy rates. "Also banks are not lending," he said.
Yesterday’s auction was oversubscribed, with tenders flooding the auction floor at P15.840 billion against the offering volume of only P3 billion.
Analysts said that while the drop was more dramatic than expected, it was not completely unexpected, especially after the 25-basis point reduction in the policy rates of the BSP last week.
Edeza said the rates were expected to pause and stabilize before making any more major moves.
"I don’t see it moving lower anymore, at least not substantially or as substantial as 50 basis points," he said.
On the other hand, Finance Secretary Jose Isidro Camacho said the decline in the benchmark 91-day T-bills would not necessarily mean an adjustment in the government’s target rate which now stands at 10 percent to 11 percent.
"It’s something that we will be discussing at the Development and Budget Coordinating Council but it’s hard to tell," he said, adding that "It’s not even a matter of whether the drop in rates is sustainable."
Camacho said the yield curve was very steep but longer term T-bill rates have not moved as significantly as the 91-day T-bills. "If we see a consistent drop in both ends of the range, then maybe we can talk of making adjustments in the target," he explained.
Market analysts have repeatedly said that the rates for short term notes have been declining while the interest rates for longer-term notes were actually moving higher, resulting in an even steeper yield curve.
"The 91-day T-bill should be seen in relation to the rest of the yield curve because the market might be misled to thinking that rates overall, are really declining. What we’re seeing is just small component of the whole scenario," said one trader from a local bank.
The decline in interest rates has done little to improve bank lending, with most banks reluctant to pass on the cuts to their borrowers despite the so-called "gentlemen’s agreement" between the BSP and the Bankers Association of the Philippines (BAP).
The BSP has begun monitoring lending rate to see if the recent cuts in its key policy rates and the decline in T-bill rates were being reflected in commercial banks’ lending rates.
As lending rates reached a historic low of 6.714 percent last week, banks should be charging at most 11.714 percent. However, BSP records show that some commercial banks were charging as much as 12.75 percent.
"There was some confusion on the applicability of the agreement," said BSP Governor Rafael B. Buenaventura. "Banks said they thought it applied to prime borrowers, but it actually applied to all creditworthy borrowers."
Buenaventura said that although the government could only exert moral suasion on banks, they still agreed that interest rates of five percentage points over the 91-day T-bill would be applicable to creditworthy borrowers.