COMMENTARY FOR INFINITY DOLLAR UNIT INVESTMENT TRUST FUND (UITF)
The Dollar Trust Maximizer posted an absolute year-to-date return of 2.6743% and year-on-year return of 5.0431%, net of taxes and fees while the Infinity Dollar Long Term Bond Fund has an absolute return of 4.0078% since its inception date as of end of the first quarter of 2008.
Philippine sovereign bonds experienced a very volatile 1Q2008 as global credit markets continued to reel from the subprime crisis that began to unfold last July 2007. The rally in prices seen in 4Q2007 began losing momentum at the onset of 2008 as equity markets in the US got off to their worst since 1982 due to persistent recession fears. Financial institutions continued to post significant 4Q2007 writedowns and losses as a result from their holdings of various mortgage-backed and asset-backed securities. Monoline insurance companies also came under pressure as ratings agencies threatened to strip them of their Triple-A ratings. Equity markets in Europe and Asia experienced a ripple effect and fell up 10-15% in the middle of January as evidence of a US recession became more apparent.
The uncertainty on how much more writedowns will be in the offing created the fear on the market to invest in risky assets, such as high yield bonds with Emerging Market Bonds included. The casualty in this debacle, a US investment house, encountered liquidity problems in the middle of March and ultimately ended in a run. A US bank, with the assistance of the Federal Reserve, acquired the investment house at the end of March at $10/share.
The Federal Reserve took aggressive action in the face of the market turmoil as it cut the Federal Funds Rate, which began the year at 4.25%, three times by a total of 200 bps to its current level at 2.25% in an effort to calm the markets and provide liquidity to the financial system. The Fed first cut rates on 22 January by 75 bps (an inter-meeting move), then on 30 January by 50 bps, and finally on 18 March by another 75 bps. The Fed also introduced two new measures aimed at ensuring liquidity in the system - the Term Auction Facility and the Term Securities Lending Facility. Chairman Ben Bernanke remained vigilant during the quarter, assuring the markets that the US Central Bank will do everything in its power to avert a full-blown financial crisis.
On the fiscal side, the US government side announced a stimulus plan involving tax cuts and rebates (total amount $150 million) in an effort to boost consumer spending and support a slowing economy. Americans are expected to receive their checks by the summer of 2008.
As expected, ROPs have been broadly affected by the events taking place in the global markets. They have, however, proven quite resilient. Prices dropped by as much as three percentage points from their years high during the most turbulent times of the quarter (mid-January and mid-March) but have rebounded up to within one percentage point off their year highs to settle at current levels. One reason for the buoyancy of ROPs is that there are a lot of maturing issues in 2008, most notably ROP08s and a number of other corporate issues. This leaves the market with the task of reinvesting these maturing funds, most of which re finding their way into longer dated ROPs. Another factor is the stability of Philippine economic fundamentals through 1Q2008, which have caused ROPs to remain an attractive investment for both local and foreign houses.
The Dollar Trust Maximizer and Infinity Dollar Long Term Bond Fund will remain invested in the ROPs as we continue to look for trading opportunities given the stable economic fundamentals in the country despite the weakening of the US economy and the growing concern on the continued writedowns and losses of financial institutions as a result from their holdings of various mortgage-backed and asset-backed securities. We will, however, be cautious as we keep an eye on US economic data.