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
(632) 858-3001

Morning Brief: 01 December 2010

Treasury bill rates drop to all-time lows Treasury bill rates declined during Tuesday’s auction—the last government offering for the year—and hit a new all-time low as banks awash in cash scrambled for the virtually risk-free securities. The rate for the bellwether 91-day T-bill only reached 0.775 percent from the previous rate of 1.48 percent. This was the first time the interest rate for a government debt security fell below one percent. Tenders for the three-month securities reached P4.1 billion, about four times the government’s debt offering of only P1 billion. The 182-day bill fetched a rate 1.65 percent—down from the previous rate of 1.983 percent. Volume of bids for the six-month debt instruments hit P8.33 billion, exceeding the government’s offering of P2.5 billion. Also, the rate for the 364-day bill settled at 2.383 percent from 2.394 percent of the previous auction. Tenders for the one-year bill reached P7.96 billion—over twice as much as the government’s offering of P3.5 billion. “There are so much funds in the system. Banks scrambled for the T-bills given that it is the last auction for the year,” National Treasurer Roberto Tan said in a briefing after the offering. Jonathan Ravelas, market strategist for Banco de Oro, the low Treasury rates were due to the substantial liquidity in the system and renewed risk aversion resulting from Europe’s debt woes. Ravelas said some foreign investors decided to shift funds from the equities market into safer havens, including government securities and the dollar. “The drop in interest rates is a function of huge liquidity. Moreover, uncertainties in the international front brought about by the debt crisis in Europe is pushing investors to assets considered much less risky,” Ravelas said. According to Tan, another reason for the low interest rates is the low inflation outlook. The Bangko Sentral ng Pilipinas expected annual inflation for November to range between 2 and 2.9 percent. Based on this projection, inflation in the first 11 months of the year could settle anywhere between 3.8 to 3.9 percent—closer to the lower end of the official cap set at between 3.5 and 5.5 percent. The BSP believes that the low inflation environment may remain over the short term. As a result, there would be no reason for banks to seek high yields from government securities, officials said. BIR likely missed Nov. goal; full-year target beyond reach? THE BUREAU of Internal Revenue (BIR) has all but abandoned this year’s collection goal as it likely missed its target last month. "I don’t know if [we were] able to reach it (the November target) because the goal is too high," BIR Commissioner Kim S. Jacinto-Henares said in a telephone interview yesterday. She did not provide estimates but noted that last month’s P86.03-billion goal was nearly 23% more than the actual take of around P70 billion a year earlier. November data will be released by Dec. 15, Ms. Jacinto-Henares said. The BIR -- which accounts for about two-thirds of the state’s tax revenues -- remains behind target with collections at P670.8 billion as of October, below the P700-billion goal for the period. Blame has been laid on the government’s adoption of a higher 2010 economic growth target -- 5.0-6.0% from 2.6-3.6% previously -- which meant that the BIR’s collection goal had to be raised to P860.4 billion from P830.4 billion. "The P860.4-billion [2010 goal] is no longer possible ... [but] P830 billion is doable," Ms. Jacinto-Henares said. She explained that to meet the full-year target, the BIR needed to collect an extra P30 billion on top of its P73.78-billion goal for December. "That would be very hard [to meet], that’s why I say the P860-billion target, to be able to be met, really needs a stretch [by the BIR]," she said. Missing the November goal would add pressure to the budget deficit as the Customs bureau, the country’s second main revenue agency, has already said it may have missed its P26.93-billion target last month.

U.S. Stocks Decline on European Debt Concern; Google Slumps on EU Probe U.S. stocks declined, preventing the third straight monthly advance for the Standard & Poor’s 500 Index, amid concern that Europe’s government debt crisis will worsen and as Google Inc. faced an antitrust probe. Google fell 4.5 percent, the most since July, after European Union antitrust regulators began an investigation. EBay Inc. dropped 3.6 percent after the stock’s rating was cut at Piper Jaffray & Co. Bank of America Corp. slumped 3.2 percent, the most in the Dow Jones Industrial Average, as the cost to insure its debt against default climbed to a 16-month high. The S&P 500 fell 0.6 percent to 1,180.55 at 4 p.m. in New York, below its end-of-October level of 1,183.26. The Dow lost 46.47 points, or 0.4 percent, to 11,006.02. Stocks briefly erased declines as President Barack Obama suggested he’s willing to compromise with Republicans on extending tax cuts. Treasury Two-year Notes Rise as Irish Crisis Fuels Demand for Safe Assets Treasury two-year notes rose as speculation Ireland’s funding crisis may spread to Portugal and Spain increased demand for the relative safety of U.S. government debt. Thirty-year bond yields pared declines after reaching the lowest in three weeks as the Federal Reserve bought more U.S. securities as part of its $600 billion plan to bolster the economy. Industry reports showed consumer confidence rose and Midwest regional businesses expanded. The dollar reached a 10- week high versus the euro as Portuguese, Italian and Spanish government bonds slumped, encouraging demand for a refuge. “The longer end has come off some as we’ve had a good rally the last few days and with economic news better, and month-end buying out of the way, investors are becoming more defensive when it comes to duration,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada’s RBC Capital Markets unit in New York, one of 18 firms that trade directly with the Fed. “The economic news, while not great, is not as weak as it’s been. So we are seeing people take profits.” Two-year note yields fell six basis points to 0.46 percent at 5:10 p.m. in New York, touching the lowest since Nov. 23, according to BGCantor Market Data. Benchmark 10-year yields declined two basis points to 2.8, after falling as much as seven basis points, paring the monthly increase to 14 basis points. Thirty-year bond yields fell three basis points to 4.11 percent, after touching the lowest since Nov. 5. The decline reduced the so-called long bond’s monthly yield increase to 13 basis points.

Oil Falls as Heating Fuel Drops, European Debt Woes Signal Lower Demand Oil fell, following heating oil lower, as concern the European Union may have to bail out more member states pushed the euro to the lowest level in 10 weeks. Crude dropped more than $1 a barrel in the last half hour of floor trading, led by declines in heating oil before the expiration of the December contract today. The cost of insuring Portuguese and Spanish debt against default climbed to records yesterday after Ireland accepted a bailout package. “Oil has fallen on the possibility that the problems that are going on in Europe will spread to Portugal and Spain and maybe Italy and Belgium,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. Oil for January delivery dropped $1.62, or 1.9 percent, to settle at $84.11 a barrel on the New York Mercantile Exchange. Prices rose 3.3 percent this month, the third consecutive increase, and are up 6 percent this year.

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
(632) 858-3001

Morning Brief: 30 November 2010

Net ‘hot money’ inflow breaches $3B mark Investments should translate into jobs By Michelle Remo Philippine Daily Inquirer The flow of “hot money” into the Philippines surged further this month, breaching the $3-billion mark, as investors continued to bet on favorable economic prospects over the short term. Data from the Bangko Sentral ng Pilipinas showed that the net inflow of foreign portfolio investments from the start of the year to November 12 reached $3.44 billion. Gross inflows amounted to $10.19 billion, while gross outflows settled at $6.75 billion. Most of the inflows are invested in stocks, while others are placed in bonds and bank deposits. From January to November last year, the net inflow of foreign portfolio investments reached only $372 million. “There is significant amount of liquidity globally, and part of this liquidity is going to emerging economies like the Philippines,” BSP Governor Amando Tetangco Jr. said. Foreign investors have been placing funds in the Philippines and other developing economies in Asia because of projections that the region would continue to drive growth of the world economy. While the increase in “hot money” inflows highlighted investors’ confidence in the country, some economists said the portfolio investments would not amount to much unless these could be turned into long-term, job-generating investments. They said investments in stocks, bonds and bank instruments are short term in nature and only serve to strengthen the peso—a development that will adversely affect exporters. Tetangco said there should be a sustained push for investments and that there should be viable, attractive investment opportunities to make the growing liquidity more productive. “Credit is already growing. However, we have this huge liquidity available in the system for deployment into productive activities, and so there is room for further increase in bank loans,” Tetangco said. He said there should be enough investment opportunities to encourage banks to lend more of the funds they are getting as deposits. Tetangco is hopeful that the Aquino administration’s Public-Private Partnership (PPP) program will help spur demand for and actual extension of bank loans . Lucky bettor from Luzon wins P741-M Grand Lotto jackpot By Miko L. Morelos Philippine Daily Inquirer The losing spell in the Grand Lotto 6/55 ended on Monday night when an extremely lucky bettor from Luzon bagged the P741-million jackpot by betting on the winning combination 11-16-42-47-31-37. Lottery gods must have smiled on Monday night because someone beat the 1-in-29 million odds, a feat that had proved elusive for at least six months since this streak began. The jackpot at P741 million was the biggest in the country’s history. Liza Gabuyo, PCSO assistant general manager, said the bettor picked the combination, standing to win the pot tax free. It took 86 draws before a bettor won the jackpot. The previous biggest jackpot was posted in February 2009, when the pot for the 6/49 Super Lotto game reached P347 million. Two lucky bettors picked the same combination to split the top prize.

U.S. Stocks Drop as Concern Grows About European Debt Crisis U.S. stocks fell, sending the Standard & Poor’s 500 Index down for the fourth time in five days, as Ireland’s bailout failed to ease investor concern that Europe’s debt crisis may spread to the southern region. The S&P 500 rallied in the final 90 minutes of trading, almost wiping out a 1.3 percent drop, as the measure bounced off a level watched by chart analysts. Hewlett-Packard Co. and Verizon Communications Inc. lost at least 1 percent, pacing declines in the Dow Jones Industrial Average. Visa Inc. sank 1.7 percent as an analyst said mobile-network operators may take market share. Wells Fargo & Co. and Bank of America Corp. led a rally in financial shares, gaining more than 1.6 percent. The S&P 500 retreated 0.1 percent to 1,187.76 as of 4 p.m. in New York, after earlier falling below its average price of the last 50 days of 1,177. The Dow lost 39.51 points, or 0.4 percent, to 11,052.49. “There seems to be plenty to bother the market,” said E. William Stone, who oversees about $105 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “There’s concern about the European financial crisis affecting healthier economies and the viability of the euro. This issue seems to be far from over. I’m not sure that the market is going to be happy with much of anything right now.” Treasuries Rise on Concern Aid for Ireland Won't Contain Euro-Zone Crisis Treasuries rose, with 10-year notes up for a third day in a row, on concern the rescue for Ireland will fail to contain Europe’s sovereign-debt crisis, increasing demand for the safety of U.S. government debt. The Federal Reserve bought $9.4 billion of Treasuries as part of its plan to pump $600 billion into the economy through June and keep yields low. Bonds fell earlier as euro-region governments agreed to an 85 billion euro ($113 billion) aid package for Ireland. “The concern is what’s next,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Gorup Inc., one of the 18 primary dealers that trade with the Fed. “At what point do we legitimately begin to question the extent the European Central Bank can be an effective backstop and what unknowns remain out there?” The 10-year note yield fell five basis points, or 0.05 percentage point, to 2.82 percent at 5:03 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 12/32, or $3.75 per $1,000 face amount, to 98 9/32. Ten-year yields are up 22 basis points this month, while down 102 basis points this year.

Crude Oil Increases to the Highest Level in Two Weeks on U.S. Retail Sales Oil rose to a two-week high as U.S. consumers spent more over the Thanksgiving weekend than last year, a sign confidence in the economy is strengthening. Oil climbed above $85 a barrel as the average U.S. shopper increased purchases by 6.4 percent from the 2009 period, a report from the National Retail Federation showed. Crude also advanced amid speculation that colder-than-normal weather may boost demand for heating fuel in the eastern U.S. and Europe. “People are looking at a pretty decent retail environment, and that’s giving oil a boost,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Cold weather is more bullish earlier in the season than later. If people turn on their heaters early and they stay on, that’s good for the season.” Oil for January delivery climbed $1.97, or 2.4 percent, to $85.73 a barrel on the New York Mercantile Exchange, the highest settlement since Nov. 11. Futures have gained 13 percent in the past year.

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
(632) 858-3001