Dollar bonds may be ‘next victim’ of Duterte rhetoric

After a rout on the stock and foreign exchange markets, the safer bond market could become the “next victim” of President Duterte’s harsh rhetoric, according to a Bloomberg columnist. “If Duterte continues with his fiery rhetoric and controversial policies, bond investors can expect the (bond) premium to erode further, regardless of local dollar support,” Christopher Langner said in his opinion piece titled “Duterte’s Next Victim.”

Citing data from JPMorgan Asian Credit Index, Langner said Philippine bonds are now the region’s worst performing, with prices down 0.55 percent and credit default swaps (CDS) trending higher.

He did not cite figures for the latter, but he took note that since last year, the country’s CDS has been lower than that of South Africa and Hungary.

“That’s changing, however, because of the Philippines’ outspoken leader,” he said.

In the bond market, prices go down whenever investors view securities more risky and vice-versa. Their yields, which measure the interest government pays to bondholders, have an inverse relationship to prices.

CDS, meanwhile, works like an insurance for the bondholders, such that its spread rises whenever the bond seller, in this case the Philippines, is deemed more risky.

Langner’s assessment followed a 2.02- percent drop in the benchmark Philippine Stock Exchange index last month alone. It was down 43.58 points or 0.58 percent to close at 7,534.71 yesterday.

The peso likewise has suffered losses, plummeting 4.12 percent to a seven-year low against the US dollar last month. The local unit further weakened to P48.35 to a dollar yesterday.

The financial market performance happened during the time the President lambasted the US and European Union and warned about cutting ties with them, while seeking to boost ties with China.

For context, it also coincided with the decision of the US Federal Reserve to keep policy rates steady after weeks of expectations. The Fed is still likely to raise them by December.

Higher rates in the US, the world’s safe haven, attract investors and keep capital away from the Philippines, but analysts have said Duterte and his tirades may have also created some impact.

For now, Langner said the Philippines has somewhat escaped the large bond outflows, thanks to the maintenance of investment grade ratings.

These, however, may no longer be secured and he said “it wouldn’t be surprising” if a downgrade is in the offing among Moody’s Investors Service, S&P Global Ratings and Fitch Ratings.

At least one of them, S&P, has warned recently of “policy uncertainty” from Duterte.

Finance Secretary Carlos Dominguez III had met with their representatives in the US to assure them of strong economic fundamentals.

“A little over five years ago, the Philippines was rated junk. Being relegated to that category again would increase its cost of borrowing and have a ripple effect on the banking and corporate sectors,” Langner said.

“If you believe that would be enough to stop Duterte from being controversial, then international bond investors have less to fear. If not, their rough trot could continue,” he added.