Funds Performance

The Premium Income Fund (PIF) Net Asset Value Per Unit (NAVPU) in the months ended October, November and December 2007 were P1,004.325, P1,004.166 and P1,004.414, respectively. The fund’s fourth quarter yield of 5.050% was 1.014% higher than the fourth quarter average 91-day T-Bill rate of 4.036%. The fund’s year-to-date (YTD) yield of 5.208% was 1.098% higher than the YTD average 91- day T-Bill rate of 4.110%. The PIF thus outperformed its benchmark in the fourth quarter of 2007 as it did in the third quarter. Moreover, the PIF's yields have tax privileges premised on the length of invested term while yields on T-Bills are subject to 20% tax.

In the fourth quarter of 2007, investments in government securities, promissory notes and commercial papers made up 32.4%, 17.5% and 15.7% of the portfolio. In the previous quarter, investments in government securities, promissory notes and commercial papers made up 14.3%, 35.1% and 15.3% of the portfolio. Placements in special savings accounts, time deposits and BSP reserve requirements remained steady at 34.4% by end-2007 from 35.3% in the previous quarter.

The monthly income credited to your account is computed by multiplying the difference between the end-of-month’s NAVPU and your beginning-of-month’s NAVPU of P1,000 by the number of units as shown in your Certificate of Participation. The said interest payout (gross of tax) brings the value of your investment to its original principal amount.

The BSP's twin goals of keeping inflation low and the exchange rate steady have largely dictated the central bank's monetary policy stance in 2007. In May, the BSP opened the Special Deposit Account (SDA) window to banks' trust departments to mop up excess liquidity in the financial system and control inflationary pressures. By July though, the BSP began cutting down its overnight borrowing rate for the first time since raising it to 7.5% in 2005. The rate was down to 5.25% by end-2007 in response to aggressive interest rate cuts in the US and tame inflation in 2007. The BSP rate cuts buoyed the prices of domestic government securities and helped stem the peso's rapid appreciation within 4th quarter 2007 owing to strong dollar inflows from both OFWs and investors. Intrinsically, local interest rates should remain low due to the Philippines' stable macroeconomic fundamentals (7.3% GDP growth in 2007), improved creditworthiness (following Moody's recent announcement of the upgrade on the country's sovereign credit rating outlook from stable to positive) and the government's improved fiscal position (P9.4 billion deficit in 2007 versus the P63 billion target). However, the combined threats of rising inflation due to the skyrocketing price of crude oil and political turmoil surrounding the ZTE corruption scandal may drive up market yields moving forward. The peso bond market is thus seen to face a bumpy road in the months ahead in view of heightened political risks as well as inflation and fiscal concerns. Measures that may attempt to contain interest rates are the Bureau of Treasury's constant rejection of excessively-high bids for Treasury bills and bonds during auctions, the BSP’s conservative policy stance amid inflationary pressures in anticipation of wider yield differentials between peso and dollar assets and sustained improvements in revenue collections by the BIR and Customs bureau to achieve their targets for the year and beyond.

The US Federal Reserve started to aggressively cut interest rates beginning September 2007 when the US sub-prime housing sector collapsed in August 2007. The Fed's aggressive rate reductions have brought down its bellwether Fed funds rate to 4.25% by end-2007 from 5.25% at the beginning of the year, thus bringing down with it the yields of comparable emerging market sovereign bonds such as the dollar- and euro-denominated ROP bonds. Further rate cuts may take the Fed policy rate to 2.00% within the next semester. With the shadow of a US economic recession looming in the horizon, risk aversion has become the main trading theme of global financial markets, with investors preferring 'safe haven' investment outlets such as US Treasury bonds and commodities such as gold and crude oil futures. Nonetheless, the Philippines' stable macroeconomic fundamentals (7.3% GDP growth in 2007), improved creditworthiness (after Moody's recent upgrade on the Philippine sovereign rating outlook from stable to positive) and the government's improved fiscal position (P9.4 billion deficit versus P63 billion target in 2007), plus the growing supply scarcity of ROP bonds due to reduced debt issuances, are seen to remain the principal price drivers for the ROPs this year. Moreover, the government's proposed issuance of $2.5 billion worth of ROP warrants in February will enable holders of dollar- or euro-denominated ROP bonds to convert to peso-denominated bonds in case of sovereign default. This should prop up investor interest in the ROP bonds amidst market volatility as the banks will no longer need to trim down ROP positions to meet stricter risk requirements under Basel II. However, these same strengths, plus the strong dollar inflows from OFW remittances, are seen to further lend strength to the peso against the already-weakening US dollar this year, potentially offsetting trading and valuation gains for holders of ROP bonds. In the medium term, rising political risks and ongoing negative sentiment in emerging market bonds may lead to a softening of bond prices, although this should present buying opportunities later on in anticipation of an expected market rally towards year-end.