Morning Brief: 02 December 2010

Swap to involve at least P60B in new bonds -- gov’t THE GOVERNMENT will issue at least P60 billion of 10-year and 25-year bonds in exchange for existing bonds as it harnesses investor interest to lengthen its maturity profile and deepen the local debt market. Asia’s largest sovereign issuer of foreign debt said that as part of the swap offer, which will be open from today until Dec. 10, it would also buy back some bonds on issue using funds raised from selling the new 2035 bonds. No new funds would be raised in the deal. "This liability management exercise aims to establish a benchmark for long-term financing to support government initiatives promoting public-private partnership for infrastructure and economic development," Deputy Treasurer Eduardo S. Mendiola said in a statement. The government will issue a minimum P30 billion in new 2020 bonds in exchange for papers maturing between 2011 and 2019, and P30 billion of new 2035 bonds in exchange for bonds due to mature between 2011 to 2034. One trader said the government would have to offer attractive yields to get a strong response given interest rates were expected to rise next year. "Right now, how much premium are we expecting? When I go around asking insurance companies, they want above 8%," the trader said. The Philippines has been capitalising on a global shift by investors to emerging markets to lengthen its maturities, and it also wants to cut foreign exchange exposures by increasing the share of domestic debt in total bond sales. In September, it issued almost $3.2 billion in new 2021 and reopened 2034 US dollar bonds in a debt swap and sale. First Metro Investment Corp., HSBC, BPI Capital Corp. and state-run Land Bank of the Philippines are joint dealer managers and arrangers of the domestic swap. Finance Secretary Cesar V. Purisima has said the government wants to issue 25-year bonds regularly after the debt swap to make long-term funding more accessible as the country looks to encourage private investment in infrastructure projects. -- Reuters BSP sees T-bill correction TREASURY bill rates, which hit record lows last Tuesday, are bound to correct, the Bangko Sentral ng Pilipinas (BSP) said. “Situations of very low or very high levels of an economic price that is market determined would not persist for very long. Market forces will help correct such situations,” BSP Governor Amando M. Tetangco, Jr. said in an email to BusinessWorld yesterday when asked if the very T-bill rates were market-distorting. The rate of the 91-day T-bill, which serves as a benchmark for banks’ short-term loans, fell to 0.775% last Tuesday. The 91-day paper rate has been declining since the October 4 auction when it fetched 3.9%. The six-month paper got an average rate of 1.650% while the one-year T-bill rate dropped to 2.383%. Mr. Tetangco attributed the short-term debt papers’ low rates, particularly during the last two auctions, to the combination of peso and dollar liquidity in the system, the investments available to foreign and local investors, investors’ appetite for risky but high-yielding assets in emerging market economies like the Philippines, and developments abroad. “An added feature of the low GS (government securities) rates in (Tuesday’s) auction, as I see it, was market positioning for the year-end, given that the auction had been announced as the last for the year for short-dated instruments,” he said. The same factors that accounted for T-bill rates’ fast decline will drive the expected correction. “We can expect some market correction to this, given the factors I listed before,” he said. Market players said the central bank’s intervention in the foreign exchange market had driven investors to government securities, as they were left with few options on where to place their money. Seeking to control peso volatility, the BSP had not rolled over some of its swap positions, resulting in a dollar squeeze -- and a weak peso. If banks reprice their loans based on the ultra-low T-bill rates, then their net interest margins would narrow, resulting in lower income. On the other hand, their portfolios would rise if they charge lower rates on their loans -- but also risk incurring more nonperforming loans. Marcelo E. Ayes, senior vice president at the Rizal Commercial Banking Corp., said in a telephone interview yesterday a correction is needed given that rates have declined too fast. He said a correction may take place as the government undertakes a bond swap. “With the bond swap, short-term papers will be surrendered and there could be some sort of correction,” he said. He added said a correction could take place once there is a new supply of the short-term papers. Deputy Treasurer Eduardo S. Mendiola said in an interview yesterday that no date has been set for the next T-bill auction. “There is no schedule yet. We have no more T-bill auctions for this year,” he said. Regarding the peso, Mr. Tetangco reiterated the BSP does not target an exchange-rate level. “We aim for reasonable levels of volatility in the exchange rate movements such that business planning can be managed. “Our actions in both the spot and swap markets continue to be guided by this,” he said. Mr. Mendiola said the last Treasury auction for the year is scheduled next Tuesday. The government, he said, will sell P8 billion worth of five-year bonds. -- with Prinz P. Magtulis

U.S. Stocks Rise Most in 3 Months as Economy Improves U.S. stocks rallied, sending benchmark indexes toward their biggest gains in three months, amid improving economic data and speculation of a larger European financial rescue. Schlumberger Ltd. and Dow Chemical Co. rallied more than 3.8 percent as commodity prices gained. United Technologies Corp. and General Electric Co. rose at least 2.2 percent as Deutsche Bank AG said they may benefit from Airbus SAS’s plan to develop A320 aircrafts with new engines. Motorola Inc. jumped 4.6 percent after detailing plans to split into two companies in January. Microsoft Corp.climbed 3.7 percent after forecasting 2011 may be “biggest year ever” for its Xbox division. The Standard & Poor’s 500 Index surged the most since Sept. 1 on a closing basis, adding 2.2 percent to 1,206.41 at 2:50 p.m. in New York. The Dow Jones Industrial Average gained 259.2 points, or 2.4 percent, to 11,265.2 as all 30 stocks rose. Treasury 10-Year Yield Reaches Four-month High on ECB Speculation, Economy Treasury 10-year note yields reached the highest since July as reports showed the U.S. economy strengthening and concern eased that the European debt crisis is spreading reduced the appeal of U.S. securities as a haven. The yield on benchmark note rose for the first time in four days after an industry report showed the U.S. added more jobs than forecast in November, signaling a labor market recovery is under way. The Federal Reserve said the economy gained strength in 10 of its 12 regions as hiring improved, manufacturing expanded and retailers anticipated a stronger holiday shopping season. U.S. stocks rallied, sending benchmark indexes toward their biggest gains in three months. “Stocks are up big, peripheral bond markets are doing better and people are feeling more optimistic that the euro is not coming unraveled, which is weighing on the bond market,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “The news and data show there are moderate reasons for optimism as we have gone from slow growth to somewhat faster growth.” The benchmark 10-year yield rose 17 basis points to 2.97 percent at 5:02 p.m. in New York, according to BC Cantor Market Data, touching the highest since July 30. The yield fell to 2.75 percent yesterday, the lowest level since Nov. 23. The 2.625 percent security due in November 2020 fell 1 13/32, or $14.06 per $1,000 face amount, to 97 3/32.

Crude Oil Gains as Chinese Economic Growth Counters Europe Debt Concern Crude rose to the highest level in almost three weeks on greater-than-forecast growth in U.S. private employment and Chinese manufacturing and on signals the European Central Bank will act to prevent the spread of the region’s debt crisis. Prices surged 3.1 percent as companies in the U.S. boosted payrolls the most since November 2007, according to figures from ADP Employer Services. Chinese manufacturing expanded at the fastest rate in seven months. Futures reached the day’s high after Goldman, Sachs & Co. said oil will average $110 a barrel in 2012, up from a forecast $100 a barrel next year. “As the global economy goes, so goes oil,” said Andre Julian, chief financial officer and senior market strategist at OpVest Wealth Management in Irvine, California. “The economic numbers in China and elsewhere today have been very strong and point to accelerating growth.” Crude oil for January delivery increased $2.64 to $86.75 a barrel on the New York Mercantile Exchange, the highest settlement price since Nov. 11. The contract is up 11 percent from a year ago.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
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