While the Fed raised rates, the BSP kept interest rates at historic lows. Furthermore, credit rating agency Fitch upgraded the nation’s credit profile. The Fitch move has been in contrast to the S&P which has recently warned against the country’s deteriorating debt quality. [Wow. Money Supply Breakout Powered Record Phisix! S&P warns of Deteriorating Credit Quality! October 1, 2017]
Like in the US, three bywords serve as the Pavlovian “classic” conditioning for manic bidding of asset markets: “Tax Reform”, “Infrastructure” and “Cryptocurrency”.
The Fitch upgrade fell for the “tax reform”. Interestingly, when Fitch made the same upgrade in March of 2013, ROP yields collapsed (or Philippine bonds were bid). The peso rallied.
And the spread between the US Treasuries and the Philippine treasures converged to record lows. I called this the convergence trade. [Phisix: The Convergence Trade in the Eyes of a Prospective Foreign Investor November 11, 2013]
Well, this time is different.
Yields of Republic of the Philippines (ROP) bonds soared (or prices fell). Or, investors sold down Philippine bonds in spite of the Fitch upgrade!
In fact, the 25-year ROPs breached 6.1% last Friday, the highest since June 2013! 20-year closed at 5.996% while the 10-year at 5.685%, both were at 2012 highs!
Moreover, the difference between the 10-year ROPs and the 10-year US Treasury Notes (UST) have been the highest since at least 2014. (lower window) From 2013's convergence to the current divergence.
Please note that whenever the spread between the ROPs and USTs widened significantly, the peso rallied. The interest rate parity arbitrage partly explains this phenomenon.
The more intense selloff at the long-end has prompted for a steepening curve.
Such steepening could be a reason behind the recent record rise in the shares in bank stocks as net interest margins could have been expected to widen.
The rampaging bank stocks, of course, have been also from the massive end-session pumping of BDO shares. Yes, the SY group has amassed a whopping 29.17% market cap share of the Phisix! And as I have been saying here, this hasn’t been a normally functioning market.
Although of course, the yield steepening has been a fresh dynamic. Rocketing bank shares commenced from the start of 2016, and its second leg in the advent of 2017.
And more, since interest rates are part of the economic calculation, the rising cost of financing will inhibit demand for loans.
ROPs have been anticipating a tightening by the BSP. A better perspective would be that ROPs have virtually been pressing the BSP to raise policy rates. However, the BSP has palpably been unwaveringly resisting.
This is why I say that the BSP has been terrified by the 2015 episode for them to adamantly cling to the belief that free lunches would last forever!
At Php 234.9 billion, the 10-month fiscal deficit is Php 18 billion or 8.7% MORE than the Php 216.05 billion in 2016.
The 10-month trade deficit of US $21.95 billion has also marginally surpassed 2016’s US $21.74 billion. This is a fiscal deficit induced trade deficit.
It is a keynesian spending binge out there!
Don’t you see? Money is free in the Philippines!
The government’s debt engines (domestic and foreign) has been recharged (up 7.12% in October). The banking system’s overall production PLUS consumer loans have been raging (+19.11% in October). The banking system’s bristling loan growth act as indirect subsidies to the government through inflation targeted nominal GDP. Or, aggregate demand is expected to boost NGDP which in turn transforms into taxes
And the BSP’s net claims on National Government or debt monetization has remained at record highs (+11.59%).
You see, F-R-E-E MONEY! Free money has been the source of the freebies (record stocks and property prices) and related stuff (consumption spending sprees and statistical G-R-O-W-T-H)!
And more free money: ADB announced that it would lend $380 million to the government for Mindanao infrastructure! So the Philippine government continues to amass sources of US dollar shorts. That is $380 million reasons to be bullish the USD-Php.
So there you have it. With the help of the Fitch, the BSP has been fighting off ROPs.
It is Politics versus the (managed/manipulated) Markets.
Guess which of the two will eventually prevail?
Nothing is what it seems!
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