Yields of 5 and 10 Philippine Treasury Bonds Spike to 5-Year Highs, Will the BSP Raise Rates?

Only in the Philippines…

 

89.11 points in 2 days! That would be about 1.06% change from last Friday’s close.

More importantly, marking the close represents the pillar to record PSEi!

And guess, which issues were the major beneficiaries?

To the main event…

Philippine 10-year bond yields have consecutively spiked in 3 days. From a tight clasp by unseen forces, this benchmark yield, as I noted last weekend, had been emancipated. Put differently, the markets may have been allowed to determine the present levels of the benchmark yield

And the sharp increases have not been confined to the 10-year but had also been manifested in the (monthly) yield of the 5-year bond which likewise has reached 5-year highs.

 

The question is WHY?

The BSP’s monetary board will meet this Thursday, whence they will render a decision on its monetary policy.

Because the government have become too acutely dependent on free money, I am not inclined to think that they will be raising rates

However, the actions in the bond markets appear to indicate otherwise

 

Remember the 10 successive months of 30+% money supply growth rates? The resultant levitated inflation pushed the 10-year bond yield up. Eventually, the BSP raised rates.

When the BSP launched its silent stimulus in late 2015, the benchmark yield initially reacted by falling. The BSP responded by chopping interest rates to its momentous lowest levels in June.

From then (June 2016) to the present, the same benchmark yield has risen way above the 2014 levels. And more importantly, such level has remained significantly elevated for over a year.

Since current yield levels have been HIGHER than in 2013-14, inflation rates could have actually been LARGER than those reported by the BSP and the PSA

In its report yesterday, which reported October CPI at 3.5%, the BSP said “The resulting year-to-date average inflation rate of 3.2 percent remains within the Government’s target range of 3.0 percent ± 1.0 percentage point for 2017”

The irony is that the inflation target and the inflation statistic which is supposed to be measured are both constructed by the government. Thus the government can make the inflation statistic say anything.

Nevertheless, the numbers have been on the high side of the target.

Moreover, one multinational institution has warned for the second time in three months that the economy “can be overheating”.

Some questions

Has actions in the bond market, the peso and real economy been persuasive enough to impel BSP to tighten soon? And or, will the BSP succumb to pressures to institute a hike?

If they do hike or tighten, how deep would it be? Would this be offset by the BSP’s stealth stimulus (and reserve requirement cut)?

Interesting.

The Shifting Role of the Phisix; Escalating Share of the Top-5 issues Extrapolate to Enhanced Concentration Risks!

The Shifting Role of the Phisix; Escalating Share of the Top-5 issues Extrapolate to Enhanced Concentration Risks!

Famed Austrian Public Relations personality Edward L. Bernays wrote in his classic Propaganda

No serious sociologist any longer believes that the voice of the people expresses any divine or specially wise and lofty idea. The voice of the people expresses the mind of the people, and that mind is made up for it by the group leaders in whom it believes and by those persons who understand the manipulation of public opinion. It is composed of inherited prejudices and symbols and clichés and verbal formulas supplied to them by the leaders.

Let me apply Mr. Bernays logic to the domestic stock exchange.

Exactly what does the Phisix stand for? What should it represent?

The Philippine Stock Exchange Composite Index (PSEi), formerly called Phisix, according to the Philippine Stock Exchange’s PSE academy, is a fixed basket of thirty (30) common stocks of listed companies, carefully selected to represent the general movement of the stock market. In other words, it is the benchmark measuring the performance of the Philippine stock market.(bold mine)

To repeat, the PSEi 30 should embody “the general movement of the stock market” or should serve as benchmark to measure the performance of the Philippine stock market

Such essence dominates mainstream conversations or narratives of the developments of the PSEi 30

Again, the Phisix is supposed to represent the general movements of the stock market. But how accurate has this popular perception been?

 

As of November 3, the top 5 accounted for 43.7% of the market share, the top 10 66.34% and the top 15 80.65%.

The difference between the top 5 and next 6-10 is 21.02%. Or the share weight of the top 5 represents almost twice the next quintile class!

For the 11 to 15 category, the top 5 share accounted for 3x its share weight!

 

And this lopsided share in favor of the top 5 has not been an anomaly but has signified a consistent trend since 2015. However, the deepening share of the top 5 has only accelerated in 2017! Year-to-date, the top 5’s share has increased by 13.5%!

Even more, when the PSEi broke the 8,127 barrier, the broader market has consistently sold off. Declining issues have dominated the trading environment.

With the top 5 usurping the market share of the other issues, just how does the PSEi 30 supposedly dispense the function of representing the general market?

The PSE should just change the definition of the Phisix.

And the share divide goes beyond the top 5 versus the rest.

Even within the top 5 issues, a fantastic gap has been developing.

  

 

From the top 5 perspective, the share of the Ayala Group (AC and ALI) continues to dwindle relative to the SM group.

As of November 3, the share of Ayala was at 34.48% while the SM group was at 65.11%. The Ayalas and the SM group have switched places

For the SM group alone, their cumulative share weight has accounted for almost a third of the PSEi.

Again, hasn’t the index been supposed to represent the general market? Then why the extremely skewed balance towards the SM?

Because of earnings? Such perception would be unfounded.

For over the past 4 years and a half, Ayala Corp has consistently outperformed its rival the SMIC. But still, the SM has managed to grab the larger share of the market cap

SM can’t even beat JFC. (It has done so in one out of 4 years - I know this is apples to oranges)

The point here is what justifies the relentless capture of the market cap share weight by the SM Group at the expense of the rest?

Because SMPH used Php 4.9 billion in the 1H to push up their stocks?

Because the major beneficiaries of end-session pumps have been the SM group?

Here’s the thing.

With the SM led capture of a significant share weight of the PSEi, the PSEi now represents NOT the general stock market but the SM GROUP.

It would not be useful to make a discussion on the Phisix when it is truly about SM. Perhaps the all share index could serve as a more appropriate indicator.

Since the PSEI embodies mostly SM, discussions predicated on the assumption of the general movement of the markets would only mislead.

Given the political-economic environment, the blindness of the officials the PSE, SEC and BSP would seem understandable. The protection of the interests of certain special powerful and wealthy group/s have been more important for them.

Yet such political related myopia would come at a steep cost. SM’s 29% share or even 43.7% share of the combined SM and Ayala has accounted for the broadening of CONCENTRATION risks

The law dictionary defines concentration risk as “the RISK of loss arising from a large position in a single ASSET or market exposure”. (all caps original)

The point is a prospective revulsion of any of the two largest market caps, based on any reason at all, will likely trigger a chain effect in the stock market.

The common assumption is that nothing can go wrong with SM Group or the Ayala Group. Yet The same assumption guided Enron and Lehman to their downfall.

Such asymmetry exhibits the mounting scale of distortion attained from the constant manipulations of the index.

And a final thing, Friday’s pump and dump had been amazingly seismic. The usual concerted pump via the afternoon delight pushed the Phisix to a new intraday record at 8,605. However, the new record was met with a sudden meltdown in about less than 30 minutes (excluding the market intervention and runoff phases).

And the marking the close went to the opposite direction another 99 points was chopped. Perhaps the largest ever mark-the-close on the downside.

At the end the day the Phisix gyrated by a whopping 3.74%!

But do observe that the SM Group had been less affected by the selloff.

Bernay’s wisdom applies to the current setting.