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COMMENTARY FOR INFINITY DOLLAR UNIT INVESTMENT TRUST FUND (UITF)
The Dollar Trust Maximizer posted an absolute year-to-date return of 3.0569% and year-on-year return of .0927%, net of taxes and fees while the Infinity Dollar Long Term Bond Fund had an absolute return of .1438% since its inception date as of end of the first quarter of 2008.
Have we seen the worst of this financial crisis? This question seemed to be at the back of every investor's mind as the market rooled into the second quarter of the years. First quarter corporate earnings came in with mixed results across different industries, with technology and commodity companies posting earning broadly better than forecast. On the other hand, bank, brokers and other financial institutions continued to report weak quarterly results and additional writedowns. Banks also embarked on an aggressive capital-raising campaign to replenish the witedowns their balance sheets had to absorb. The Federal Reserve again cut overnight interest rates by 25 bps at the April 30 FOMC, bringing the Fed funds rate to 2%.
A major development in 2Q08 was the accelerated rise in the prices of commodities, most notably crude oil. Oil futures traded at USD100/bbl at the end of March and went on to reach USD140/bbl by the end of June. Market watchers attributed the surge in oil prices to fund managers treating oil as an alternative asset class as they pursued excess returns, with stock and bond markets offering minimal, sometimes negative yields. There was still, of course, constant real demand from oil-dependent nations and industries. The rise in commodity prices sparked a global rise in medium-term inflation expectations. Inflation became the daily buzzword and concerns of runaway inflation would ultimately be the catalyst in the dramatic rise in bond yields witnessed in late 2Q08.
The resiliency shown by the ROPS during 1Q08 carried into April and May as the markets found comfort in low US interest rates, the Federal Reserve/JP Morgan rescue of Bear Stearns, and the abundance of cash on the balance of sheets of Philippine banks. The economic stimulus package approved by the US government was expected to take effect through 2Q/3Q08, diminishing concerns of a recession in the world's biggest economy.
All this positive sentiment, however, was neutralized when inflationary pressures began to surface in the midst of surging commodity prices. US inflation climbed to a 17-year high of 5% in June. Asian countries also reported multi-year inflation figures, with the Philippines printing 8.3% in April, 9.5% in May, and 11.4% in June. This prompted the BSP to raise its overnight borrowing rate by 25 bps to 5.25% at the June 5 Monetary Board meeting to temper inflation expectations.
Emerging market bonds were hit hard by the lingering inflation scare, with ROP prices falling by as much as 10% during the first three weeks of June. Indonesian sovereign bonds experienced a similar decline in prices. 5-year ROP credit default swaps widened from 237 bps at the end of March to 270 bps at the end of June. The market saw broad-based selling from offshore accounts as funds went underweight emerging market credit. Local accounts, awash with liquidity, supported the market as yields became more and more attractive and Philippine economic fundamentals remaining solid.
Expect the financial markets to continue experiencing high levels of volatility in 3Q08. Commodities continue to trade at unprecedented levels, keeping inflation front and center of investors' concerns. Second quarter earnings will be reported with financials expected to continue posting weak results. We will see if the stimulus package can keep the US economy bouyant. The consensus now is that the worst may not be over, so it best be prepared for an extended bumpy ride moving forward.
The Dollar Trust Maximizer and Infinity Dollar Long Term Bond Fund will be invested in short duration following the accelerated rise in the prices of commodities, particularly crude oil. We will remain on the sideline as we expect inflation to rise and possible announcement of more writedowns by financial institutions. We will however, keep an eye on possible opportunities for investments for the dollar funds.
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