Eli M Remolona: Establishing a benchmark yield curve - why we need
it and how can we do it?
Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the 40th Environmental Scanning Exercise , Manila, 7
June 2024.
* * *
Members of the Monetary Board, BSP (Bangko Sentral ng Pilipinas) colleagues,
esteemed guests, ladies and gentlemen, good morning.
Let me add my welcome to MBM (Monetary Board Member) Annie's (Anita Linda
Aquino) welcome. Welcome to this 40th environmental scanning exercise (ESE).
This year marks a milestone. We are celebrating the 20th anniversary of this exercise.
For the past two decades, ESE has been fertile ground for policy discussions at the
BSP.
Today our focus is on the topic, "Building a Benchmark Yield Curve using Interest Rate
Swaps."
I have my own strong views on this topic, but because we have such an excellent
lineup of presenters and discussions, I expect those views to change.
Allow me to share those views.
As many of you know, a benchmark yield curve is something we need to strengthen the
transmission mechanism of our monetary policy.
It is also part and parcel of the goal of developing the country's capital markets.
A benchmark yield curve is one that serves to reconcile the diverse views of market
participants. This makes it very useful for pricing other instruments including mortgages
and corporate term loans.
At present, we rely on something called BVAL (Bloomberg Valuation Service) for our
yield curve.
I have described this curve as a very choppy curve. That choppiness is an indication of
a fragmented bond market with liquidity shifting from one maturity to another.
Perhaps, one way to fix this is to revive our interest rate swap market. I say revive
because I was told we used to have such market and I do not understand why it died.
In the Eurozone, when that economy switched to a common currency in 2000, their
bond market was also a fragmented one. The most active ones were the German bond
market, the Italian bond market, and the French bond market, in that order in terms of
turnover.
Then, an amazing thing happened out of nowhere. The euro interest rate swap market
emerged.
By 2001, within one year, the turnover in the swap market had surpassed the turnover
in those other three bond markets and it soon became the benchmark yield curve for all
of the Eurozone.
Eventually, we hope to see a similar benchmark yield curve in the Philippines. One that
can potentially be smoother than the BVAL curve.
We hope that we can get ideas from this discussion on how some curve-it does not
have to be the swaps curve-could gain wide acceptance as a benchmark among market
participants.
All of these may require some government initiative. It maybe that the regulators killed
the interest rate swap market, but we want to understand what happened and what
could happen after today.
So, I hope with today's ESE, an amazing thing will also happen, and I think this is a
place where we can plant the usual seeds of collaboration to aid capital market
development.
On that note, I encourage everyone's active participation. Let us have a very productive
session.
Maraming salamat at mabuhay tayong lahat!