Has the Philippine Black Swan Event Arrived? Panic Selling in the Philippine Bond Markets!!!

I am reluctant to be a bearer of bad news especially as Christmas eve approaches, but silence won’t stop reality from happening.

I have also written about the risk of a Black Swan event occurring in the Philippines at the start of the year, except that my focus has been on Phisix and bubble industries. 

Well, the Philippine Black Swan event may have just arrived: Today Philippine bond markets suffered a horrific meltdown!

Yields across the curve has shockingly spiked! This adds to yesterday, as well as piggybacks on the turmoil that began two weeks ago!

Short and medium maturities skyrocketed at a tremendous rate to incredibly flatten the domestic yield curve! The yields of 4 and 5 year treasuries has even INVERTED!!!

Let me present the domestic bond market rout! [All charts from investing.com]

Yields of 1 month and 3 month surged 5.04% and 4.05%, respectively!!! Even the one month yield has moved significantly away from June 2013 taper tantrum highs.

Yields of 6 months and 1 year treasures soared 4.93% and 4.88% correspondingly! Again yields of both have short term securities has been racing farther away than the June 2013 taper tanturm levels.

Yields of 2 year and 3 treasuries vaulted by a staggering 6.5% and 4.43%!

2 year treasuries now at January 2014 and June 2013 taper tantrum levels. 3 year Philippine securities now beyond taper tantrum levels

Yields  of 4 year bonds spiked 3.8% as 5 year yields inched higher by only .83%

Yields of 7 year and 10 year bonds rose by a more moderate 1.36% and .94%

Yields of 20 year and 25 year bonds also rose  modestly at .18% and +1.08%

As one would note, increasing yields across the curve means a general selloff in Philippine bond markets.

And as the short term yields of 1 year and less crescendoed, the upside spiral of 2-4 year yields means a catching up or a spillover from the actions in the short term sphere.

Yields of 4 year (3.661%) and 5 year (3.659%) bonds have even inverted (see box) or 4 year yields are HIGHER than the 5 year equivalent! 

A stunning rate of flattening can be seen via the narrowing  or collapsing yield spread of 20 year and 10 year MINUS 1 year! Simply astonishing!

Let me repeat what I said yesterday: “Philippine treasuries essentially represent a tightly held or controlled markets by the government and the domestic banking system” such that “for any strains in Philippine treasuries to emerge means that some formal economy institutions, perhaps in the financial sector, have already been feeling pressures.”

Also from yesterday, 

Soaring bond yields comes in the face of exploding credit growth, declining statistical economic G-R-O-W-T-H and a sharply decelerating money supply growth rate! Where has all the money from the explosion of credit growth been funneled to??? Mostly to paying debt, perhaps??? Borrowing to rollover debt has now segued into a frantic jostle for short to medium term funds even at higher rates???

For the generally controlled domestic bond markets, why has there been deepening signs of wilting under financial pressures? Who among the financial institutions have been feeling the heat? Does the stock market know? Has the rigging of the index been designed to raise cash by drawing greater fools into momentum to pave way for the operators to gain from spreads to pay off heavy debt burdens? Has today's bond selloff and the 3 week dramatic tightening of the yield curve been circumstantial evidence of the unraveling of Hyman Minsky's Ponzi finance?

Since bond prices moves in opposite direction to yields, the current streak of treasury yield spikes translates to real time financial losses for mostly financial institutions that owns or holds Philippine treasuries as part of their portfolios.

Ironically, panic buying in the stock market comes in the face of panic selling in domestic bonds! Who will be caught swimming naked, the panicking bond market seller or hysteric stock market buyer??

The current Philippine bond market havoc will have ramifications on the domestic credit markets, to systemic liquidity, to  economic and credit risks conditions and to interest rate directions, as explained here, here, here and here

In January of 2013 I wrote that interest rates will determine the fate of asset prices and of an economy deeply dependent on credit:

Let me repeat: the direction of the Phisix and the Peso will ultimately be determined by the direction of domestic interest rates which will likewise reflect on global trends…

Yet interest rates will ultimately be determined by market forces influenced from one or a combination of the following factors as I wrote one year back: the balance of demand and supply of credit, inflation expectations, perceptions of credit quality and of the scarcity or availability of capital.

And as noted last week, if financial and the real estate markets are driven by liquidity and if the flattening of the yield curve have indeed been about liquidity constrains then this might be the calm before the economic storm.

Given the recent momentum of bond market rout, and if sustained, such would only extrapolate to a looming domestic economic storm ahead!

To my dear friends, if you are exposed to variable interest rate debt, pls try to reduce or settle them or if not convert them into fix rates.