PHILIPPINE COMMERCIAL CAPITAL, INC

Market Situationer January 30 to February 3 2012

Highlights: Fourth quarter 2011 GDP growth at 3.7% on slower exports and weakening global economy (30 Jan). o Gunigundo: The real gross domestic product for the fourth quarter shows the scope for monthly accommodation. The January inflation, if within the BSP forecast, will further support the idea that low policy rates does not necessarily lead to high inflation. BTr awards 20-year Treasury bond issue in full, opens tap facility (31 Jan). o Tan: There is a preference now for longer-term papers because of benign inflation outlook this year and expectations that interest rates will continue to remain low in the foreseeable future. Tan on RTB issuance: Could take place this month, to finance P88 billion maturities. (1 Feb) o Tenor: 10-years at least. o P500 billion RTB approval for 2012. Unemployment rate in 2011 drops to 7.0% from 2010s 7.3%. (2 Feb) * All quotes from Business World Government Securities Total bids for last weeks 20-year Treasury Bond sale amounted to a P41.475 billion (the largest volume since August of last year). The new issue fetched a coupon of 5.875%, with the average yield touching 5.906%, around 8 bps lower than prevailing secondary market rates. Market players, in light of tame inflation outlook and expectations of another rate cut (4Q 2011 GDP growth hits lower end of forecast) this March, submitted bids as low as 5.75%. In light of the huge tenders, the BTr opened the tap facility to issue another P8 billion in 20-year FXTNs. Secondary market rates dove after the results of the auction were released. The rally was further bolstered by expectations of a credit upgrade for the Philippines. FXTN 20-17 fell 29.25 bps the entire week, hitting a low of 5.7025% on Friday morning. Likewise, FXTN 25-8 shed 32.5 bps to bottom at 5.825%. The 10-year FXTN 10-55 went below 5% to trade at 4.98% (- 19 bps), while the newly issued FXTN 20-18 dropped 16.5 bps to 5.71%. With yields of most tenors at its lowest levels, the yield curve was at its flattest in recent history, with the difference between 2- and 10-year debt at 227 bps from 299 bps at the start of the year. Foreign Exchange The deadlock in talks to refinance Greek debt saw the Peso lose P0.225 (P43.075) against the U.S. Dollar on Monday. The local currency bounced back in the coming days, gaining a total of P0.415 on improvements in the Greek debt impasse, better-than-expected China and U.S. manufacturing data and the prospect of another credit upgrade for the Philippines. The Peso closed at P42.66 (+ 0.285) on Thursday. On Friday, the local currency still managed to eke out a P0.06 gain (P42.60), despite trading at P42.82 on early morning trade. Total weekly volume for the USD-PHP spot market amounted to $5,706.56 million. Stock Market The PSEi went on a three-day rally to reach another all-time high of 4,822.08 (+ 106.44) on Thursday, as expectations of another rate cut and favorable international economic data lifted local stock prices. The main index succumbed to profit taking on Friday, retreating by 63.51 points to cap the week at 4,758.57.

Figure 1: FXTN Yield Curve (PDST-R2)

Rates Forecast Lack of interest in short-term tenors could result into higher Treasury Bill rates in this Mondays auction, according to a Business World report. The 91- and 182-day bills fetched 1.674% and 2.222%, respectively, in the previous auction, while bids for the 364-day bills were rejected in full.
Sources: Business World, PDEX, Philippine Daily Inquirer, Bloomberg