Q1 Market Review on Dollar Bonds
Philippine sovereign bonds continued to outperform at the start of 2010 as positive market sentiment carried over from a stellar year in 2009. Investors went about adding risk to their portfolios throughout January after unloading assets and locking in profits towards the end of the previous year. Global markets, however, were rattled in early February as news regarding the fiscal problems of Greece began to emerge. Discussions began in earnest among members of the European Union and the European Central Bank to determine how to address the situation. These talks ended up to be a drawn-out process as officials debated heavily over the prudence of any support package was arranged among the Euro bloc countries and the IMF. This program was contingent on the implementation of fiscal austerity measures by the Greek government. Markets continued to be volatile as fears of contagion across Europe remained persistent.
Economic conditions were better throughout 1Q2010 outside of Europe. Economic data out of the US were consistently solid, if unspectacular. Improvements in the manufacturing and service sectors were reported, but numbers out of the housing sector remained inconsistent. Broad confidence also improved as 4Q2009 US GDP printed at a robust 5.7%. The markets took comfort in the apparent but gradual return to stability of the US economy. The Federal Reserve also took action, raising the discount rate by 25 basis points to 0.75% to encourage banks to return to a recovering money market for short-term funding requirements.
Asia was the star performance for the quarter as it almost single-handedly pulled overall growth upward. This looks to be a recurring theme throughout 2010 and even further ahead. Forecasts on China’s GDP were expected to be well over 11% for FY2010. In February, China overtook Germany as the world’s largest exported as the country’s exports grew by 46% Y-oY. The Chinese government began taking steps to cool the economy, raising reserve requirements by 50 basis points in January and implementing measures to curb bank lending. Cuts in infrastructure spending were also announced. The rest of the region also showed strong growth and solid fundamentals.
In the Philippines, focus began to fall squarely on the national elections scheduled for May. The consensus called for an orderly and peaceful electoral process, which led to sustained appetite for Philippine sovereign bonds. As always, the healthy liquidity positions of local banks provided firm support to Philippine debt. The government successfully sold JPY100 billion in samurai bonds in late February and announced plans to sell US dollar-denominated Retail Treasury Bonds in 2Q2010. Finance officials announced plans to meet with ratings agencies sometime in 2Q-3Q2010 and discuss a possible ratings upgrade. At the forefront of the Philippine case are economic stability, record foreign exchange reserves, accelerating growth, and low inflation.