THE COST OF BORROWING incurred by Philippine bond issuers fell sharply in the third quarter due to the resurgence of investor appetite, as concerns about the global crisis wane, monetary officials said Wednesday.

The so-called “EMBI + Philippines spread,” which measures the additional yield investors seek when purchasing Philippine bonds instead of US treasuries, averaged 264 basis points in the third quarter. This was narrower than the 323 basis points recorded in the second quarter of this year and the 321 basis points in the third quarter of 2008.

“Credit spreads narrowed in the second quarter of 2009 relative to the spreads in the previous quarter, indicating that investors may be regaining some appetite for regional assets amid signs of easing recessionary pressures gaining traction,” the Bangko Sentral ng Pilipinas said in its report on economic and financial developments for the second quarter.

The same report showed that credit default swap (CDS) spreads for Philippine bonds narrowed to 180 basis points in the third quarter, tighter than the 216 basis points in the second quarter and the 286 basis points in the third quarter last year.

CDS spreads represent the cost of insurance—or the cost of protecting creditors against default—that holders of the debt securities pay.

“Emerging market borrowing costs fell to levels before the collapse of Lehman Brothers,” the central bank said in the report.

Monetary officials said sentiment among foreign portfolio investors has improved substantially since the collapse of Lehman Brothers that eventually sparked the recent global financial crisis.

The fresh appetite is benefiting, however, emerging markets like the Philippines more than industrialized nations because of the resiliency showed by the former amid the worst crisis since the Great Depression.

BSP Governor Amando Tetangco Jr. earlier said the Philippines could expect a further increase in capital inflows amid improving confidence of investors, who were earlier pushed to the sidelines by the turmoil.

Tetangco said growth in the Philippines, which avoided a much-feared recession, would accelerate in the coming months, partly aided by capital flowing into the country.

In the first quarter, growth of the Philippine economy slowed down to 0.6 percent, which put the country on the brink of a recession. Aided by pump-priming measures of the national government and the central bank, however, economic growth accelerated to 1.5 percent in the second quarter.

Following the release of the second quarter growth, economic managers have thus ruled out a recession

The BSP earlier revised its projection on the net inflow of foreign portfolio investments for the Philippines this year from $500 million to $3 billion.

Monetary officials said resumption of risk appetite came earlier than anticipated.

Tetangco said a consequence of rising inflows to the Philippines and other emerging markets in the region would be the appreciation of the peso and other Asian currencies against the US dollar.

Although the official policy of the BSP is to allow a market-determined exchange rate, Tetangco said the BSP intervenes from time to time to avoid sharp fluctuations of the peso. He said the BSP was prepared to undertake measures to keep the peso from appreciating sharply to levels hurtful to exporters.