Philippine banking system's excess liquidity remains high

Without rate hikes from Bangko Sentral ng Pilipinas anytime soon, ample liquidity in the banking system should keep government bond yields in the Philippines low. The government sold PHP 9 billion of 10-year bonds at an average yield of 5.485% yesterday, which is much lower than the 5.896% yield at which 10Y bonds were last auctioned in August.

Ten-year yields are now down 200bps from the Jan 21 high of 7.79% and likely to stay low in 4Q11 as excess liquidity in the banking system remains high. The sharp fall in 3M Phibor to 0.88% from above 4% in July is evidence of the substantial build-up of excess liquidity, which will take time to unwind. Liquidity conditions should normalize gradually in 4Q11 and that should mean some upward pressure for bond yields.