MONETARY BOARD REJECTS PROPOSAL TO SUSPEND SALE, THOUGH
by Jun Vallecera
Reporter
THE Bangko Sentral ng Pilipinas has vowed to restore order in the panic-stricken unit investment trust fund (UITF) market where investors jostle to exit from the P230-billion business as fast as their fund managers would let them.
While conceding that intervention was an option, the central bank’s policy-setting board stopped short, though, of taking the drastic step of suspending the sale of UITFs.
A senior monetary official said intervention was “an option” that, when it comes, could take the form of an open market operation (OMO) just like they do at the local currencies market.
“We may do just that,” the official, requesting anonymity, said on Friday.
Private banking sources claimed the Bureau of Treasury had intervened on Friday, gobbling up what the market “foolishly” let go in their panic that their investments no longer yielded returns reaching as high as 21 percent only recently. See also Margie Grey's "Not Business as Usual," B1.
National Treasurer Omar Cruz declined to comment on the matter.
OMO, as regulators refer to the term, essentially involves the buying or selling of government securities in this case and is one of several monetary tools at their disposal.
“The BSP does not buck the market but we are sensitive to volatility,” the official said, frustrated that a well-designed product as the UITF still falls victim to stress arising from the shortsightedness of some quarters.
There had been calls for the BSP to take the drastic step of suspending the sale of UITFs, but the policy-making monetary board rejected the proposal.
According to one official who requested anonymity, the UITF bond market is at its core a market for government securities whose main driver is the movement of interest rates.
“Therefore, pricing is a function of volatility,” he noted.
UITFs sold like proverbial hotcakes in recent months on account of the heightening confidence in the fiscal sector and its ability to balance the budget over the near term.
Bond prices went up as interest rates retreated until more recent data, particularly from the large US markets, indicated that the long party may soon be over.
Indications the US Federal Open Market Committee may raise interest rates to curb inflation sparked apprehension the BSP’s seven-man monetary board may also hike its own interest rate structure.
“What should have been an orderly retreat from the market became a snap-back in which UITF rates fell sharply as panicky investors sold their holdings.
“The selldown, which came all at the same time, caused the rates to fall even lower,” officials said.
Private bank officials said now should be the time to buy what the market is selling at fire sale prices.
“The market’s fundamentals have been saying prices were to fall, and so it’s a good idea to buy them now when UITF investors are being irrational.
“It would have been sensible for them to hold on to their investments, to just sit tight and look at the rates again when things have quieted down,” the officials said.
Banco de Oro Commercial Bank owned up on Friday to having been affected by panic-driven withdrawals at its P65-billion unit investment trust fund.
But its president, Nestor Tan, said the worst is over for the industry that at one point gave out yields as high as 21 percent.
“We have been affected by the mass selldown but I believe the situation is now under control. There is no reason to be concerned [for] your principal,” the bank executive said Friday to assure those who still have money in UITFs.
Unlike regular bank deposits, UITF investments do not enjoy coverage from the Philippine Deposit Insurance Corp. and in theory at least, one could lose one’s principal investments just as much as one could enjoy returns as high as 21 percent the business gave as recently as three weeks ago.
“Past performance is never an assurance of future returns,” Joey Bermudez, president of China Trust Bank, warned UITF investors weeks ago.
BDO’s Tan said their UITF business accounts for roughly half the bank’s total trust fund assets of P130 billion.
“There were [significant] losses in net asset value [per share] for the people who left early,” Tan noted.
This pertains to the unit value of one’s UITF holdings at the time so called participation units were sold at panic prices two weeks ago, compared to their value at the time the original investment was made.
http://www.businessmirror.com.ph/0529/front01.php
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