Investors have been piling into five-year credit default-swaps on the Philippines sovereign in the last two weeks on the back of uncertainty shrouding presidential elections scheduled for May, as well as the tough domestic economic situation. "The election is now under the spotlight," said one credit head. Dealers are concerned that a victory for populist candidates could derail ongoing reforms. In addition, rumors of an impending sovereign debt issuance triggered demand for credit default protection.
"It's been quite active," said Sandeep Gill, head of credit derivatives at DBS in Singapore. The government is rumored to be planning a USD500 million to USD1 billion bond issue before year-end, and this has driven activity in the default swap market. "They need the cash," said the credit head, adding that further issuance will push down bond prices and drive more interest in purchases of credit protection. On the flip side, Filipino end-users were comfortable selling default-swaps on the sovereign at what they regard as attractive levels, giving a strong boost to two-way flows, said dealers. "They sell protection irrespective of foreign beliefs," said the credit head, explaining that investing in government issues is treated as a risk-free asset, requiring no capital charges for banks.
Traders noted that five-year protection has traded well over 20 times in the last two weeks, whereas it usually trades less than five times in a typical week. "Our bids keep getting hit," said a credit derivatives trader at a European firm, adding that his firm racked up several trades on the credit. Two weeks ago, credit protection on the Philippines widened out from a midpoint of 380 basis points to levels as high as 440 bps, before inching in around 420bp late last week. Philippines debt is rated BA1 by Moody's Investors Service.