Phisix 10,000:Clues From Philippine Bond Offering

When we talk about investing, it is universally about the expectations of the shifting balances of demand and supply in specific markets.

And the recent issuance of the Philippine bonds should give us a clue.

From Finance Asia, The Philippines returns with $750 million deal

Here is an excerpt (bold emphasis mine)

``At the time of pricing, the yield resulted in a spread of 332.6bp over the 10-year US Treasury maturing in May 2019. This marked a sharp tightening versus the 599.9bp spread that was required when the Republic of thePhilippines sold $1.5 billion of 10-year bonds due in June 2019 in January this year and shows how much the market has improved since then. The yield on the 2019 bonds has dropped to about 6.4% now from 8.5% at the time they were issued.

``Even more impressively though, sources said the new bonds priced right in line with the implied Philippines curve as interpolated from the yield levels of the Philippines 2019s and 2024s. In other words, investors received no new issue premium at all.

``Not that this seemed to worry them. The offering attracted $4.4 billion worth of demand split on 202 orders, even though the term sheet clearly stated that the $750 million deal size would not be increased. As usual for Philippine issues (this is after all the country that "gave a name to the Asian bid", as noted by one analyst), a large chunk of that demand came from domestic investors, and in the end, 40% of the deal was allocated to Philippine accounts. Investors based in the rest of Asia took another 20%, while 25% went to the US and 15% toEurope.

``In terms of investor type, funds took 50%, banks 39% and retail investors 6%. The remaining 5% went to insurance companies and "others".

Some notes:

-Tightening spreads means greater demand for local debt over US treasuries.

-Investors received no premium yet the offering had been oversubscribed.

-Locals commanded the bulk 40% of the financing, which demonstrates of the immense liquidity (source of financing) of the system.

In a world of Zero Bound Policy, where yields (Peso and US dollar) on fixed income has been going down and the US dollar-Philippine Peso trades in a tight range-essentially narrows the choices for local institutions and investors as to where they should allocate savings.

And the above conditions which is an unambiguous manifestation of the loose monetary landscape is essentially shaping an environment for greater yield searching dynamics backed by a prospective expansion of credit from a system that has been largely underleveraged.

This shifts the risk premium from financial markets to real business investing.

All said, you are looking at a prospective boom (bubble) in the local equity market!

Phisix 10,000, anyone?