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Polytechnic University of the Philippines College of Economics, Finance and Politics Department of Economics

Treasury Bill Rates in the Philippines (2001-2010)

Balakit, Rose Ann C. Oracion, Imee Grace J.

Submitted to: Prof Norie Lolong

I.

INTRODUCTION

Structure and Rationale of the Study

In light of the various capital crises in the Philippines for the past few years, efficient Philippine Money Market Instruments help to mobilize financing for growth and development.

One of the Money Market instrument issued in the Philippines is the Treasury Bill. It is a short term instrument that matures in a year or less than that. There are three tenors of Treasury Bill 91day, 182day, and 364 day. The number of days is based on the universal practice around the world of ensuring that the bills mature on a business day. Treasury Bills which mature in less than 91-days are called Cash Management Bills. (Bureau of the treasury)

The study aims to know how treasury bills are traded in the market and also to know the trend of interest rates in 91day, 182day, and 364day Treasury Bills. The data and analysis of this study will help the people to easily see the trend of interest rates in Treasury Bills for the past ten years.

Statement of the Problem

The study aimed to answer the following questions:

1. How are Treasury Bills traded in the market? 2. What is the trend of interest rate in:

2.1) 91-day T-bill 2.2) 182-day T-bill and 2.3) 364-day T-bill?

Scope and Limitations of the Study

The study is limited only to Treasury Bills Rates of the three tenors: (1) 91 day (2) 182-day (3) 364-day, from the year 2001- 2010.

REVIEW OF RELATED STUDY

Government Securities Government Securities are unconditional obligations of the sovereign state. It is backed by the full taxing power of the sovereignty. Therefore, government securities are practically free from default.
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The Philippine Government issues two kinds of government securities (GS): Treasury Bills and Treasury Bonds, so-called because it is the Bureau of the Treasury which originates their sale to the investing public through a network of licensed dealers. Government agencies, Local Governments and government-owned or controlled corporations may float securities but these are not labeled as Treasuries. Government securities are no longer certificated, they are known as "scripless", just like in USA, Canada, China and Korea. GS discount or coupons are subject to twenty percent final income tax which is withheld upon floatation of Treasury Bills or upon payment of the coupon for Treasury Bonds. No other tax is imposed on the secondary market buyer. (http://www.treasury.gov.ph) Treasury Bills Treasury bills are government securities which mature in less than a year. There are three tenors of Treasury Bills: (1) 91 day (2) 182-day (3) 364-day Bills. The numbers of days are based on the universal practice around the world of ensuring that the bills mature on a business day. Treasury Bills are quoted either by their yield rate, which is the discount, or by their price based on 100 points per unit. Treasury Bills which mature in less than 91-days are called Cash Management Bills. Treasury bill originates their sale to the investing public through a network of licensed dealers. It is issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.
(http://www.treasury.gov.ph)

Yield Yield is the increment or interest on an investment in GS. It is the discount earned on Treasury Bills or the coupon paid to the holder of Treasury Bonds. Both the discount and the coupon are expressed as a percentage of the value of the GS on a per annum basis. Conventionally, the yield on longer dated GS are higher than the yields of shorter-dated GS. (http://www.treasury.gov.ph)

Interest Rate Interest Rates is the cost of borrowing money or the amount paid for lending money expressed as a percentage of the principal. (http://www.bsp.gov.ph) Interest rates are prices. They are the price paid for the use of money for a period of time and are expressed as a percentage of the total outstanding balance that is either fixed or variable. There are two ways by which interest rates can be defined: first, from the point of view of a borrower, it is the cost of borrowing money (borrowing rate); and second, from a lenders point of view, it is the fee charged for lending money (lending rate).

Government Securities Eligible Dealer (GSED) Government Securities Eligible Dealer (GSED) is a SEC-licensed securities dealer belonging to a service industry supervised/regulated by Government (SEC, Bangko Sentral ng Pilipinas or Insurance Commission) which has met the (a) P100 M unimpaired capital and
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surplus account; (b) the statutory ratios prescribed for the industry, and (c) has the infrastructure for an electronic interface with the Automated Debt Auction Processing System (ADAPS) and the official Registry of Scripless Securities (RoSS) both of the Bureau of the Treasury (BTr) using Bridge Information Systems (BIS), and acknowledged by the BTr as eligible to participate in the primary auction of government securities. A List of GSEDs are included in this Primer for ease of investors who wish to buy government securities. (http://www.treasury.gov.ph)

Bureau of the Treasury Bureau of the Treasury issue, service, redeems government securities for the account of National Government as may be authorized by the President pursuant to law and to administer the Securities Stabilization Fund by purchase and sale in the open market of government bills and bonds to increase the liquidity and stabilize the value of said securities in order to promote private investment in government securities. (Bureau of the Treasury Mandate- Under Executive Order No. 449. (http://www.treasury.gov.ph)) The Bangko Sentral ng Pilipinas The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines which maintains the countrys international reserves, performs credit operations, engages in open market operations, exercises supervision over banking institutions, operates the interbank real-time gross settlement system, acts as a banker of the government, and has the sole power and authority to issue currency. The BSP implements policy on interest rates that followed a market-oriented interest rate policy. That is, it allows the market to set its own rates. The
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Monetary Board only sets rates for the BSPs overnight borrowing and lending facility to influence the timing, cost and availability of money and credit, for the purpose of stabilizing the price level. The BSP can effectively set interest rates. Under the Usury Law (Act No. 2655, as amended by P.D. 116), the Monetary Board can prescribe the maximum interest rates for loans made by banks, pawnshops, finance companies and similar credit institutions, and to change such rates whenever warranted by prevailing economic conditions. (http://www.bsp.gov.ph)

II. METHODOLOGY

Research Design The researcher used descriptive research method which is designed to gather information about present existing conditions needed in the chosen field of study. This method enables the researchers to interpret the theoretical meaning of the findings for further studies.
Descriptive research involves collections of quantitative information that can be tabulated along a continuum in numerical form or it can describe categories of information in a situation.

Descriptive research involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data collection (Glass & Hopkins, 1984). Descriptive research involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data collection (Glass & Hopkins, 1984

Research Instrument

Information from different books as well to some informative articles and some reading materials were used to obtain data for the study. Data Collection Prior to data gathering, getting important details from different books and articles about the research was done. To compile data needed for this research, the researchers get information from Bureau of the Treasury website and to the different government agencies website that provide information in the study. The data gathered from government agencies websites and other related materials providing information about the research made this study possible

III.

Data Presentation and Analysis

Automated Debt Auction Processing System (ADAPS) is an electronic mode by which the National Government sells government securities to a network of GSEDs which are linked to the Bureau of the Treasury through Bridge Information System every Monday for Treasury Bills whereby Government Securities Eligible Dealer (GSED) tender their bids (both competitive and non-competitive) by keying-in the amount (minimum of P10.0 M) and yield of their choice (for a maximum of seven competitive bids and one non-competitive bid per tenor for any amount above P10.0 M) using a BIS terminal in the GSED office. Within seconds the bids are arrayed by the System in the terminals of the BTr. After the cut-off time of 1:00 P.M. the array is viewed by the Auction Committee which then decides on the award. The award is keyed-back to the respective terminal of GSEDs.
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Two days after the auction, the government securities are credited to the Securities Principal Account of the GSED in the Registry of Scripless Securities (RoSS) and the Demand Deposit Account of the GSED at Bangko Sentral ng Pilipinas is debited in favor of the Treasurer of the Philippines for the cost of the government securities awarded to the GSED concerned. This completes the trade in the primary market (from the issuer the National Government to the licensed dealers or GSEDs). This is also known as origination of GS. Over-the-Counter (OTC) is another mode of originating GS for specific investors, namely, the Government Owned or Controlled Corporations (GOCC), the Local Government Units (LGU) and the Tax Exempt Institutions (TEI), e.g., pension funds, GSIS, SSS, etc.. It is non-competitive. The Over-the-Counter is open every day. The applicable yield rates for Treasury Bills issued to GOCCs/LGUs/TEIs shall be based on the rate of the immediately preceding Treasury Bill auction. For GOCCs, the rate shall be the lowest accepted yield rate, for LGUs, the weighted average yield rate and for TEIs, the yield shall be 90% of the weighted average yield rate. According to the Department Order No. 141-95, Section 4, Treasury Bills shall be issued on a discount basis and payable on maturity of not more than one (1) year at face amount. They may be offered for sale through competitive or non-competitive auction or any other method as determined appropriate by the Bureau of the Treasury. All Treasury Bills bearing the same date of issue and the same date of maturity shall constitute one Issue; and consecutive issuance of Treasury Bills of the same maturity shall constitute a Series. Registry of Scripless Securities (RoSS) is the official Registry of absolute ownership, legal or beneficial titles or interest in GS (Treasury Bills and Treasury Bonds). Upon award of

GS to a GSEDs at the auction, the securities award are electronically downloaded to the RoSS system. On issue date the Principal Securities Account of GSED are credited of the winning bids. The GS trades are entered by both parties in their respective trading terminals using their confidential identification and password and to activate the system and authorize every transfer instruction between 9:30 a.m. to 1:30 p.m. The RoSS system checks the securities in the sellers securities account and earmark these for transfer. The system then sends an electronic settlement file to BSP containing the amount to be debited and credited to the Regular Demand Deposit Account (RDDA) of the buyer and seller. Once settlement were processed, the BSP Philippine Payment and Settlement System (PhilPASS) will send back a file message that settlement were done and the RoSS system will now transfer the earmark securities from the seller securities account to the buyer securities account. A Posted message will then send back by RoSS to the system provided. Securities and cash settlement of GS transaction to the secondary market is done via DvP on a Real Time Gross trade for trade basis. Cut-off time for peso funding in the Philippine Payment and Settlement System (PhilPASS) is until 2:00 p.m. All transaction which have been unsettled after the 2:00 p.m. cut-off time will be declared failed transaction and the earmarking on the company securities at RoSS will be lifted. A flow chart is provided to see how the Government securities such as Treasury Bill is traded in the market.

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The data gathered were analyzed using tables and line graphs that show the Treasury bill rates.

Table1. Treasury Bill Rates in the Philippines for the Past Ten Years

TREASURY BILL RATES

for the period indicated rates in percent
91-Days 182-Days 364-Days All Maturities

2001 January February March 1st Quarter April May June 2nd Quarter July August September 3 Quarter October November December 4th Quarter
rd

9.860 12.228 10.613 9.734 11.054 9.898 9.490 8.756 9.360 8.878 9.508 9.505 9.297 9.773 9.545 8.882 9.427

11.184 12.87 2 11.881 10.853 11.796 10.790 10.661 9.773 10.403 10.441 11.667 11.795 11.264 12.021 11.051 9.952 11.192

11.981 13.404 12.556 11.635 12.460 11.307 11.365 10.888 11.174 11.630 12.732 12.683 12.318 12.910 11.942 10.830 11.900

11.054 12.787 11.749 10.866 11.797 10.697 10.570 9.894 10.370 10.441 11.265 11.458 11.031 11.466 11.002 9.880 10.854

2002 January February March 1st Quarter April May June

5.433 7.884 7.185 6.371 7.218 4.692 4.407 4.778

7.827 8.481 7.704 6.864 7.757 5.384 5.001 5.736

6.822 9.215 N.I. N.I. 9.215 6.073 5.233 5.856

6.038 8.478 7.459 6.617 7.716 5.261 4.788 4.793

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2nd Quarter July August September 3rd Quarter October November 4th Quarter

4.574 4.770 4.928 5.213 5.010 5.282 5.257 5.252

5.244 5.716 5.819 6.186 5.864 6.315 6.479 6.413

5.666 5.856 6.025 N.I. 5.929 7.035 7.140 7.128

4.995 5.258 5.257 5.362 5.291 6.046 6.187 6.104

2003 January February March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter 2004 January February March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter

6.028 5.181 5.672 6.167 5.610 7.346 6.572 5.582 6.621 5.243 5.225 5.325 5.259 5.662 6.439 5.964 7.340 6.203 6.326 7.616 6.443 7.410 7.084 7.394 7.299 7.556 7.151 7.614 7.453 7.826 7.872 7.838

6.953 6.349 6.600 6.927 6.585 8.115 7.459 6.440 7.329 6.356 6.367 6.511 6.412 6.874 7.510 7.148 8.321 7.386 7.660 8.612 7.600 8.475 8.327 8.631 8.443 8.472 8.197 8.511 8.364 8.896 8.915 8.901

7.489 7.199 7.609 8.027 7.538 8.841 8.107 6.866 7.757 6.778 6.905 7.098 6.929 7.551 N.I. 7.551 9.218 8.128 8.384 N.I. 8.196 8.897 8.908 9.416 9.016 9.315 9.228 9.851 9.516 9.915 9.762 9.846

6.654 6.100 6.527 6.869 6.434 7.740 7.256 6.184 7.076 5.922 5.995 6.304 6.061 6.534 6.901 6.655 8.127 7.367 7.280 8.000 7.382 8.009 7.790 7.910 7.908 8.151 8.074 8.500 8.259 8.804 8.725 8.732

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2005 January February March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter 2006 January February March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter 2007 January February March 1st Quarter April May June 2nd Quarter July August September

6.358 7.655 6.779 6.615 7.080 6.628 6.103 5.804 6.161 5.717 5.618 5.797 5.683 5.859 5.389 5.611 5.351 4.912 5.156 4.998 5.031 4.736 4.840 6.500 5.185 6.076 5.403 5.444 5.607 5.469 4.837 N.I. 5.258 3.406 3.483 2.936 2.972 3.149 2.921 3.031 2.973 3.551 3.719 3.764

7.671 8.809 7.724 7.656 8.063 7.838 7.221 6.859 7.289 7.457 7.486 7.988 7.607 7.940 7.568 7.752 6.149 6.473 6.199 6.004 6.265 5.526 5.634 7.295 5.972 6.990 6.401 5.892 6.424 5.781 5.254 N.I. 5.558 4.184 3.991 3.428 3.462 3.688 3.538 3.958 3.713 4.639 4.782 4.837

8.683 9.873 8.690 N.I. 9.001 8.735 8.219 7.893 8.264 8.450 8.511 8.955 8.631 8.975 8.575 8.767 6.955 7.429 7.257 6.917 7.272 6.130 5.830 7.973 6.410 7.815 7.369 6.847 7.309 6.644 5.542 N.I. 6.153 4.917 4.379 3.909 N.I. 4.165 N.I. 5.174 5.174 5.438 5.607 5.643

7.528 8.582 7.651 7.482 7.935 7.481 7.181 6.558 7.071 6.989 7.340 8.087 7.407 7.950 7.531 7.733 6.196 6.629 6.465 5.973 6.429 5.465 5.419 7.181 5.837 6.878 6.391 6.061 6.425 5.965 5.265 N.I. 5.682 4.210 4.102 3.579 3.244 3.786 3.353 4.183 3.806 4.609 4.613 4.612

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3rd Quarter October November December 4th Quarter 2008 January February March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter 2009 January February March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter 2010 January February March 1st Quarter April

3.680 3.758 3.689 3.7 3.706 5.389 3.673

4.776 4.812 4.702 4.6. 4.715 6.193 4.670

5.530 5.628 5.567 5.5 5.589 6.492 5.426 5.266

4.611 4.931 4.499 N.I. 4.739 6.355 5.031 5.266 5.072 5.845 6.884 6.747 6.600 6.411 6.937 6.611 6.620 6.423 6.839 6.601 4.456 4.950 4.625 4.661 4.799 4.537 4.512 4.616 4.551 4.329 4.221 4.287 4.293 4.208 4.263 4.253 4.034 4.247 4.268 4.167 4.227 4.129

3.673 N.I. N.I. N.I. N.I. 5.699 N.I. N.I. 5.699 N.I. N.I. 6.122 4.186 4.647 N.I. 4.408 4.528 4.320 4.294 4.437 4.332 4.173 3.948 3.992 4.107 3.873 3.809 . 3.850 3.728 3.906 3.928 3.880 3.905 3.843

4.670 N.I. N.I. N.I N.I. 6.483 N.I. 6.476 6.480 6.312 6.675 6.539 4.395 4.907 4.625 4.653 4.764 4.488 4.480 4.574 4.492 4.273 4.121 4.214 4.230 4.141 4.114 4.121 3.965 4.143 4.161 4.065 4.122 4.029

5.384 5.845 6.884 6.747 6.600 6.789 6.937 6.745 6.849 6.502 7.004 6.698 4.591 5.067 4.739 4.903 4.665 4.666 4.734 4.677 4.478 4.342 4.385 4.417 4.382 4.479 4.464 4.257 4.610 4.555 4.407 4.516 4.398

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May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter 2011 January February March 1st Quarter April May June 2nd Quarter July August

3.852 3.923 3.871 3.971 3.951 3.967 3.963 3.738 2.440 N.I. 2.626

4.095 4.135 4.090 4.230 4.283 4.309 4.278 4.068 2.962 3.142

4.492 4.596 4.485 4.545 4.539 4.475 4.520 4.275 3.093 3.449

4.072 4.235 4.155 4.332 4.332 4.317 4.327 4.124 2.939 3.213

0.700 1.655 1.076 1.167 0.790 1.096 2.684 1.455 2.404

1.563 2.660 4.065 2.064 1.052 0.950 2.444 1.083 2.772

2.456 3.154 4.407 2.906 4.398 4.492 4.596 2.382 3.236

1.882 4.167 2.336 1.423 1.390 2.874 1.770 2.799

Source of Basic Data: Bureau of the Treasury N.I. - No Issuance Date Last Updated: 01 Sep 2011

Table 1 shows the interest rates on Treasury Bills during 2001 up to 2010. A line graph is also provided to easily see the 91-days, 182-days, 364-days Treasury Bill Rates.

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F ure1 T uryBill ratesin thePhilippinesfor thepas ten ig . reas t years(2001-20 10)

14 12 10 8 6 91-Days 182-Days 364-Days 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Yea r

) % ( a s r e t n i

4 2 0

Still consistent with the thrust of the government to have a low, stable interest rate, the average 91-day for the year was at 9.749%, lower than the projected rate of 12% and the previous years average rate of 9.913%. The interest rates for the 182-day and 364-day Treasury Bills were 11.142% and 11.991%, respectively. Although interest rate policy is within the purview of the Bangko Sentral ng Pilipinas, the Bureau has been a contributory factor to the decline. More transparency has been introduced in the borrowing program. For instance, the quarterly borrowing programs are regularly announced. Also, the BTr started conducting quarterly consultations with Government Securities Eligible Dealers during the year. (2001 Annual Report. Treasury.gov.ph)

During the fourth quarter of 2001, the inflation rate decelerated to 4.7 percent from 6.4 percent in the previous quarter, and from 5.9 percent in the same quarter a year ago. This was due primarily to lower inflation for major food items and nonfood items such as fuel, light and water (FLW) as well as services. The decrease in FLW inflation was due to the lower cost of imported crude oil. The inflation rate during the quarter was well below the 6.0-7.0 percent
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government target for the whole year of 2001. (Report on Economic and Financial Developments, 2001)

T-bill rates have generally been declining since mid-1998. The decline in yields continued until it reached its lowest in 2002, when rates began to inch up anew until 2004. T-bill rates eased in 2005 and 2006, reflecting decelerating inflation, improving fiscal performance, and ample liquidity in the financial system. The bellwether 91-day T-bill rate averaged 5.4 percent in 2006, lower than the 6.4 percent average in the previous year. Longer tenors of the 182-day and 364-day also settled lower at 6.1 percent and 7.0 percent, respectively, from 7.7 percent and 8.7 percent in 2005. In addition, average lending rates mirrored the movement in the yields of government securities. This decline in interest rates was accompanied by a flattening of the yield curve, which suggests an easing in monetary conditions and relatively well-contained inflation expectations.

The downtrend in T-bill rates continued until April 2007. However, beginning May, Tbill rates began to rise on account of the uncertainty brought about by the local elections. Rates continued to increase gradually until September due to worries over the impact of the US subprime mortgage market troubles on local markets, despite continued benign inflation. In December, average domestic interest rates eased to 3.7 percent, 4.6 percent and 5.5 percent for the 91-day, 182-day and 364-day instruments, respectively, following the Governments announcement of a record-budget surplus in November. These rates remain low compared to year-ago levels but are higher relative to the rates posted at the start of 2007.

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In 2008, T-bill rates trekked a general uptrend to average 6.36 across all maturities, and in particular, 5.39 percent, 6.19 percent and 6.49 percent for the 91-day, 182-day and 364-day, respectively. The rise in the yields could be traced to higher inflation due mainly to rising commodity prices and later in the year, due to the higher risk premium demanded by the market players in reaction to the global financial turmoil.

In 2009, short-term interest rates trended generally downwards to average 4.19 percent for the benchmark 91-day T-bill, 4.40 percent for the 182-day tenor, and 4.59 percent for the 364-day instrument following the six cuts in the BSPs key policy rates since December 2008.

For 2010, average domestic interest rates eased further to 3.73 percent, 3.97 percent, and 4.26 percent for the 91-day, 182-day, and 364-day instruments, respectively. In March 2011, average domestic interest rates significantly declined to 1.08 percent, 1.78 percent, and 2.08 percent for the 91-day, 182-day and 364-day instruments, respectively. T-bill rates declined relative to year-ago levels on the back of ample liquidity in the market and a benign inflation outlook, leading to unchanged BSP policy rates since July 2009.

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IV.

Conclusion

Based on the data presented, the researchers concluded for this study that the trends of interest rates give intuition to the public when is the right time to purchase Treasury Bills. Through studying this, people will be informed how Tbills are being traded in the market. Lastly, people can be assured that their money will be safe and available when their Tbills mature.

The researchers also found out that the Treasury bill rates from the past ten years have been fluctuating due to some reasons such as decelerating inflation in 2005-2006, which requests to improve fiscal performance in the financial system.

Inherent to its fiscal agency function particularly on issuance of government securities, the Bureau played a vital role in maintaining the policy of a low, stable interest rate. The average rate of 91day Tbill for the past ten years is 4.82%, 5.74% in 182days and 6.09% 364days. Bureau of the Treasury continued to be more transparent in the borrowing program and in conducting quarterly consultations with Government Securities Eligible Dealers.

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Bibliography

Arnadeo, Kimberly. What are Treasury Bills, Notes, Bonds?

http://useconomy.about.com/od/bondsfaq/f/Treasury_Bonds.htm

Bureau of the treasury-2001 Annual Report http://www.treasury.gov.ph/archives/annual%202001/2001annualreport.pdf? bcsi_scan_D4A612CF62FE9576=0&bcsi_scan_filename=2001annualreport.pdf

Bureau of the treasury-2002 Annual Report http://www.treasury.gov.ph/archives/annual%202002/cy2002annualrep.pdf

Government Securities http://www.treasury.gov.ph/govsec/aboutsec.html

Interest Rates http://www.bsp.gov.ph/downloads/Publications/FAQs/intrates.pdf

Mishkin,Frederic S. (2008). Understanding the Economics of Money, Banking and Financial Markets.Pearson Education South Asia PTE

Report on Economic and Financial Developments (Forth Quarter 2001) http://www.bsp.gov.ph/downloads/Publications/2001/LTP4qtr_01.pdf

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Treasury Bill Rates http://www.nscb.gov.ph/stats/tbills.asp

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