Determinants of Treasury Bill Rates in the Philippines

Purpose – A treasury bill (T-bill) is the safest money market instrument issued by the Philippine government and matures in a year or less than a year. This paper identified and analyzed the factors that affect the movement of the T-bill rate in the Philippines. Design/Methodology/Approach – An Ordinary Least Squares (OLS) technique was applied in this study using time-series data from 1971 to 2015. The process of forward splicing was used to complete the data of Consumer Price Index (CPI). Splicing is defined as the process of combining two or more index numbers of different bases into a continuous series of index numbers of a common base. There are two types of splicing: backward and forward splicing. In this study, only forward splicing was used because of missing data in recent years. To see if there was a structural break in the model caused by external shock (financial crisis), the model was tested for a structural stability test: specifically, the Chow Test. Findings - Based on the result, having low economic growth, low expected foreign returns, and high inflation would result in a high T-bill rate. Any major financial crisis can also influence the T-bill rate positively due to the influx of investors who would want to secure a safe investment. Furthermore, investors would be risk averse by investing in T-bills if the performance of the economy is sluggish and the expected foreign return is low. Thus, the T-bill rate serves as an investors’ guide on when they would take a riskier investment or a safer investment. Research Implications – Most studies related to this topic focused only on the use of real gross domestic product, real money supply, and expected foreign returns as factors affecting the Treasury Bill Rate. Adding two other variables in the model, inflation as well as financial crisis, and testing it for structural break, multicollinearity, and autocorrelation were the added value of this paper. Such tests are crucial for unbiased regression results that will affect the policy implications if not addressed properly.