Told You So on Philippine Bonds: Bond Vigilantes Strikes Back!

The thrashing of the Philippine asset markets has come in full circle; it’s not just equities and the peso anymore, the bond vigilantes have made their presence felt in the domestic bond markets!

Here is what I wrote last Sunday:

But two weeks back I warned, “the vastly narrowed Philippine-US spread may or could be an accident waiting to happen via reversion to the mean”

And from last week

Remember, the yield of the 10 year Philippine bonds seem to suggest that her credit risk profile has been nearly at par with Malaysia and has (astoundingly) surpassed Thailand, which for me, signifies as a bubble.

And as I have earlier pointed out, the interest rate spread between the US and Philippines has substantially narrowed. This reduces the arbitrage opportunities and thus providing incentives for foreign money to depart from local shores to look for opportunities elsewhere or perhaps take on a “home bias” position.

The EM and ASEAN bond markets are highly vulnerable to market shocks as recent events have shown…

Regardless of what BSP officials will say on sustaining low interest environment, if the selloff in global bonds persists, this will show up in Philippine bond yields.

Monday, the yields of 10 year Philippine bonds jumped 10 bps from 3.94 to 4.04. Today, the same yields soared by 23 bps or 5.71% (chart from investing.com)!

IF the bond vigilantes continue to wreak havoc on the Philippine bond markets, here are some crucial questions:

Will the BSP begin to raise rates or will they fight the bond vigilantes by conducting the domestic version of QE or do both ala Indonesia? 

Will the BSP also support the Peso by selling GIRs? Up to what extent can “record” GIRs hold up against the barrage of liquidations and flight to safety?

Rioting local bond markets only contradicts the premises of the recent credit upgrades. Will the credit rating agencies the Fitch and the S&P reverse their position soon? 

As I have been saying, credit rating upgrades signify as the allegorical “kiss of death” or a “curse in disguise”. 

Current events appear to be validating my case.

Oh by the way the crashing Philippine equity markets has been relentless. 

Today, the Phisix tumbled by another whopping 3.05% (chart from technistock.com).

During the mid trading session, the index fell almost 5% before marginally recovering.

Today’s heavy losses compounds on yesterday’s staggering 3.41% decline. This brings the Phisix into an official bear market—which is based on the technical definition of 20% loss or more n multiple broad market indexes…over at least a two-month period (Investopedia.com).

Interesting times indeed.

Nonetheless the gullible and vulnerable public whom has misread, and or has been deceived or brainwashed by what has been promoted and propagandized by the political spectrum and their media accomplices as “strong economic fundamentals” will soon be faced with harsh reality.

They will realize that “strong economic fundamentals” is the metaphorical equivalent of the “emperor has no clothes” or a phony statistical economic boom that has been cosmetically spruced and pumped up by easy money policies via credit expansion.

The unfolding convergent and deepening market actions from monetary tightening are indications of such process. This process will soon percolate and affect the real economy or that the current pain being felt by the markets will eventually spread into the economy.

At the end of the day the lesson is: social policies that promotes quasi permanent booms eventually morphs into economic/financial busts. This time is no different.