Morning Brief: 05 January 2011

Gov’t to issue $1B in peso bonds Short-lists 6 foreign banks to handle flotation THE GOVERNMENT will float $1 billion worth of peso-denominated global bonds to kick off this year’s foreign borrowing program, National Treasurer Roberto B. Tan said yesterday. Tan told the Inquirer that the Bureau of the Treasury was “still firming up the timing” for the flotation and that it has short-listed six banks to manage the issue. The list included Citigroup, HSBC, Credit Suisse, JP Morgan, Deutsche Bank and UBS. “Timing will depend on market conditions, but we are looking at $1 billion, although we have authority to float up to $1.5 billion,” Tan said. He said the planned amount for the float was “comfortable” and enough to establish a benchmark, referring to interest rates that the market could use as guides for debt instruments of the same length of maturity. “Proceeds from the bond issuance will be used for budget support and for refinancing of maturing debts,” Tan said, adding that a total of $1.2 billion in foreign borrowings would fall due in February. The planned flotation will come on the heels of the maiden issue of 10-year peso-denominated global bonds last September, from which the government raised $1 billion or P44.1 billion. Yesterday, Tan said the planned new issue might include 25-year bonds as well as shorter-term bonds. The government under the Aquino administration has resorted to peso-global bonds amid efforts to support deficit spending while limiting the country’s exposure to external financial shocks. In September, investors offered to buy $13.3 billion or more than 13 times the offered volume. A debt paper is considered global when it is offered to all markets in the world, including North America, Europe and Asia. The government usually borrows from foreign commercial lenders in terms of US dollars, euros and yen. Back then, Finance Secretary Cesar V. Purisima said the issuance was the latest development in the government’s proactive management of external liabilities, particularly with respect to reducing its vulnerability to foreign currency risk. Purisima said the government wanted to lessen the adverse effects to the debt stock of currency exchange fluctuations by issuing more debt paper in pesos rather than in dollars considering that the latter was more volatile these days. Aquino set to issue ‘open skies’ order President Aquino on Tuesday said he would issue an executive order that would pave the way for open skies in the country’s secondary airports. Foreign carriers may fly into such airports as Cebu, Davao, Zamboanga and Laoag. “Secondary gateways is the focus of the executive order,” President Aquino told reporters after Rear Admiral Alexander Pama’s assumption of office as the Philippine Navy’s flag officer in command at the Navy headquarters in Manila. “There is already an existing EO that allowed so-called pocket open skies. So, we are just reaffirming the same,” President Aquino said referring to Executive Order No. 219. Mr. Aquino said there are already foreign airlines that have expressed interest to participate in the liberalized air travel. A source close to the drafting of the open skies executive order said flying between domestic routes would remain the exclusive right of local carriers as cabotage would be prohibited. Cabotage is the privilege to fly passengers between two areas within the country.

U.S. Stocks Drop as Stronger Dollar Weighs on Commodity Producers' Shares U.S. stocks fell, with the Standard & Poor’s 500 Index retreating from the highest level since September 2008, as a stronger dollar weighed on prices of commodities and shares of the companies that produce them. Stocks pared losses as minutes from the last Federal Reserve meeting said the economic recovery wasn’t strong enough to scale back a second round of quantitative easing. Newmont Mining Corp., the largest U.S. gold producer, declined 3.3 percent as the metal fell the most in six months. Freeport- McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, lost 0.7 percent as materials producers in the S&P 500 declined 0.5 percent. The S&P 500 slid 0.1 percent to 1,270.20 at 4 p.m. in New York after losing as much as 0.7 percent. It gained 1.1 percent yesterday for its biggest advance in a month. The Dow Jones Industrial Average rose 20.43 points, or 0.2 percent, to 11,691.18 today. “The market is in a very reactive mode, trading off data points, and that kind of news dependency speaks to a lack of commitment by investors to stay invested,” said Liam Dalton, president of Axiom Capital Management Inc. in New York, which oversees $1.4 billion. “I would be suspicious of any strength early this year because we have conflicting signals and the overall economy may be improving, but it is still not so strong that it can support a major bull market.” Treasuries Little Changed After Fed's Meeting Minutes Cite Economic Growth Treasuries were little changed after minutes of the Federal Reserve’s last meeting showed policy makers said economic growth was improving. U.S. five-year notes earlier led an advance as traders speculated underwriters will repurchase Treasuries used to hedge against moves ininterest rates after completing corporate debt sales. Fed minutes showed officials felt economic gains were “not sufficient” to scale back their plans to buy $600 billion in U.S. debt to spur employment in the second round in a stimulus strategy called quantitative easing. “In general Fed policy makers think the economic recovery is gaining a little bit of momentum, although the pace is a little bit slow,” said Alex Li, an interest-rate strategist in New York at Deutsche Bank AG, one of the 18 primary dealers that trade with the central bank. “There are certainly some concerns about the economy gaining momentum -- concerns from Treasury investors. That added a bearish tone to the Treasuries market.” Five-year note yields rose one basis point, or 0.01 percentage point, to 2.01 percent at 5:06 p.m. in New York, according to BGCantor Market Data. They earlier rose to 2.04 percent and fell to 1.95 percent. The price of the 2.125 percent security maturing in December 2015 fell 1/32, or 31 cents per $1,000 face value, to 100 18/32. Ten-year note yields were little changed at 3.33 percent after rising to 3.37 percent and falling to 3.30 percent.

Crude Oil Tumbles the Most in Seven Weeks as Metals Decline, Dollar Gains Crude oil fell the most in seven weeks in New York as commodities including precious metals tumbled and the dollar strengthened. Futures dropped from the highest level in 27 months amid signals that a global economic recovery will boost investments in currencies and equities. Gains in the dollar reduce demand for commodities priced in the U.S. currency. Oil climbed 8.6 percent last month as the greenback dropped 3 percent. “Part of what the commodities rally was all about was they were the currency of last resort in terms of storing value,” said John Kilduff, a partner at Again Capital LLC in New York. “Economic prospects are helping the dollar.” Crude for February delivery fell $2.17, or 2.4 percent, to settle at $89.38 a barrel on the New York Mercantile Exchange, the biggest decline since Nov. 16. Oil touched $92.58 yesterday, the highest intraday price since Oct. 7, 2008. Futures gained 15 percent last year. Prices were unchanged from the settlement at $89.38 a barrel after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles decreased 7.51 million barrels to 337.1 million.

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

Jonathan Ravelas
Chief Market Strategist
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Rhys Cruz
Junior Researcher
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