The Philippines’ government bond yield curve flattened between end-2010 and end-2011 as inflation fears dissipated and concerns over weakening growth heightened, leading to calls for a more accommodative monetary policy and aggressive fiscal stimulus measures. In 2011, the yields on tenors of less than 1 year increased between 5 basis points (bps) and 18 bps, while the rest of the curve fell between 17 bps and nearly 200 bps.

The yield curve continued to flatten between end-December and 15 March, as yields in most tenors across the curve rose—with maturities of 3 years or less rising more than the others. Yields for maturities between 3 months and 3 years increased between 45 bps and 110 bps, while tenors of 5 years and 10 years rose 3 bps and 15 bps, respectively. Meanwhile, yields in other tenors declined between 4 bps and 37 bps. Yield spreads between 2- and 10-year tenors narrowed to 238 bps in 15 March from 291 bps at end-December.

As of end-December, LCY bonds outstanding stood at PHP3.4 trillion for an increase of 3.5% quarter-on-quarter (q-o-q). Growth in treasury and corporate bonds led the robust expansion. Fixed-Rate Treasury Notes (FXTNs) stood at PHP2.96 trillion at end-December, rising 5.3% q-o-q; corporate bonds ended at PHP436 billion for a 6.5% q-o-q increase. Treasury bills, meanwhile, shrank 10.5% q-o-q to PHP295 billion.

Effective 6 April, Bangko Sentral ng Pilipinas (BSP) will adopt a simplified reserve requirement policy. Under the new rules, existing statutory and liquidity reserve requirements will be unified into a single reserve requirement, and BSP will not pay interest to the banks on the unified reserve requirement. Cash-in-vault (for banks) and demand deposits (for non-bank financial institutions with quasi-banking functions) will no longer count toward reserve requirement compliance. Under existing rules, banks are paid interest rates of 4% on amounts up to 40% of their regular reserves. They are also paid on their liquidity reserves—a rate equivalent to comparable government securities less 50 bps. Upon adoption of the new rules, BSP will lower the reserve requirement ratio by 3 percentage points—to 18%—to offset the impact on banks’ intermediation costs. Universal and commercial banks will maintain a reserve ratio of 18% from 21%.