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Wednesday, July 12, 2006

Yield Curve Lessons Part III

And Php 1.68 it is. A more than 20% premium from the IPO price of Php 1.36 on a rainy Wednesday is definitely something not to be scoffed at.

Finally, the small investor of the Philippines can now participate in the grand scheme of stock market swings. And not only that. By having itself listed, COL also gives the investors a fresh company to invest in. Years ago, your broker down the street would always tell you to invest in "sunshine" industries. Now, tell me if this ain't "sunshine" enough.

*****

Here is the last installment of our lessons in yield curve.

Long-term rates are comrprised of two parts: the expected future interest rate plus a risk premium. Furthermore, the risk premium is equal to the sum of real interest rate risk premium plus inflation risk premium.

In the past article we said that the Fed can only control the short term rate and not the long term rate. However, this is more theory than practice. The past few months we can see how the Fed was able to influence the long-term rates by increasing the inflation risk premium. Bernanke had been for months barking like a dog on a possible runaway inflation.

Now, by influencing the long-term bought the Fed some breathing room. This enabled the Fed to increase the short-term a little more and somehow prevent that dreaded yield curve inversion.

Bryan

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