So-called bond spreads on Philippine IOUs widened further in the quarter ended September versus bond spreads a quarter earlier, indicating increased risk aversion on Philippine debt notes and on other emerging-market debt instruments.
A report only recently published by the Bangko Sentral ng Pilipinas (BSP) shows debt spreads widening in the July-to-September period when viewed against a similarly tenured US Treasury bond.
Debt spreads compute the average difference between debt instruments with different credit ratings, in this case between Philippine debt instruments and higher-rated sovereigns with lower risks. Wider debt spreads mean investors are more mindful or averse of the risks involved when holding emerging-market debt notes and tend to patronize the debt instruments of advanced economies.
Philippine debt spreads tightened in July this year when it became apparent that the US, still the country’s top trading partner and host of its various investment activities, progressively showed increasing macroeconomic strength. “Many segments of the US economy have rebounded including robust corporate profits and consumer spending as well as the impressive dip in unemployment rate. At the local front, the lower-than-expected June 2014 inflation translated to lower premiums in holding Philippine debt papers. Meanwhile, the credit rating upgrade received by the Philippines from the Japan-based credit rating agency, R&I, likewise contributed in the narrowing of credit spreads during the month,” the central bank said.
The narrowing bond spread, however, was not considered sustainable over the long horizon as debt spreads started to widen again in August this year.
“The escalating tension in the Middle East, partictularly in the Gaza area, and the continued violence in the borders of Russia and Ukraine, drove safe-haven bids for debt securities, driving yields of US long-term T-bonds down, which widened credit spreads further. On the domestic front, headline inflation accelerated as most food items posted higher prices due to tight domestic supply conditions triggered by recent weather-related production disruptions, adding pressure for debt spreads to widen,” the central bank said.
Debt spreads slightly recovered in the latter part of August up until early September but widened again on concerns the US Federal Reserve should soon make interest rate adjustments.
The measure that tracks debt instruments in emerging markets under the Emerging Markets Bond Index (EMBI) + Philippines, averaged 138 basis points wider versus only 127 basis points in the second quarter.