THE BOTTOMLINE>GOVERNMENT SECURITIES
GS Investing 101
Want to put your money in the safest place available? Try T-Bills, T-Bonds, ROPs, and RTBs
By Rienzie P Biolena, RFP®
With the Philippine stock index shedding as much as 48% of its value for full year 2008, with some bond funds reflecting negative returns, there has been a demand for safer and “risk-free” assets to temporarily park available funds while riding the volatilities. Chief among these are government securities, or GS, in short.
GS are debt obligations issued and guaranteed by the Philippine government. Being issued by the government, these instruments are considered risk-free against default and are thus safe havens of value as well as a provider of steady stream of income.
GS are basically classified into:
1) Treasury Bills (T-Bills) are government securities which mature in less than a year. There are three tenors of T-Bills: (1) 91 day (2) 182-day (3) 364-day maturities. The number of days is based on the universal practice around the world of ensuring that the bills mature on a business day. T-Bills are quoted either by their yield rate, which is the discount, or by their price based on 100 points per unit. Those that mature in less than 91 days are called Cash Management Bills (e.g. 35-day, 42-day). T-Bills do not bear interest but are rather issued and sold at a discount from face value (they can’t be traded at a premium) and are redeemed at maturity for the full face value of the instrument.
2) Treasury-Notes (T-Notes) are direct and unconditional obligations of the national government. There are currently four maturities: (1) 2-year (2) 5-year (3) 7-year (4) 10-year (5). They have coupon rates like corporate bonds with the coupon payable semi-annually in arrears. Fixed Rate Treasury Notes (FXTNs) are T-Notes that have fixed coupon rates, as opposed to Floating Rate Treasury Notes (FRTNs) which are re-priced every six months based on prevailing market rates. These however are not issued on a regular basis.
3) Treasury Bonds (T-Bonds) are like Treasury Notes (and are often used interchangeably) but mature beyond 10 years. At present, there are two maturities of bonds: (1) 20-year and (2) 25-year maturities. These are sold at its face value on origination. The yield is represented by the coupons, expressed as a percentage of the face value on per annum basis, payable semi-annually.
4) US Dollar Bonds (ROPs) are long term debt obligations of the Philippine government, denominated in United States dollars. These yield fixed rate of interest (coupon) payable semi-annually for the entire life of the securities, normally from 2 to 25 years. ROPs also come in Euro denomination.
5) Retail Treasury Bonds (RTBs) are government securities catering to the retail market, carrying a term of more than one year and can be traded in the secondary market before maturity. Currently, there are two maturities: (1) 3-year and (2) 5-year. The coupon is payable quarterly in arrears.
How to invest
For starters, GS can be secured from dealers, usually from banks. As such, investors are required to open bank accounts that serve as a settlement account with which investments are debited from or proceeds credited to. Trading processing time—the period in which investors can buy GS—is usually until noon.
The minimum amount for investing varies among dealers as well as across issuances. T-Bills, for example, can be secured for as low as P50,000 from Philippine Veterans Bank. For Banco De Oro (BDO), Bank of Commerce, Bank off the Philippine Islands (BPI), Land Bank of the Philippines (Landbank), Philippine Business Commerce Bank (PBCOM), and United Coconut Planters Bank (UCPB), minimum placement starts at P100,000. Chinabank offers T-Bills for a minimum of P200,000 while Allied Bank and PNB have a higher requirement of P500,000.
RTBs, on the other hand, are offered only by a limited number of banks, and are subject to availability, usually when issued by the government. Investors can get RTBs for as low as P5,000 from BDO and Landbank, and P50,000 from Allied Bank.
For FXTNs, dealers generally have higher minimum amount to open but some have the same amount as T-Bills for better affordability. BDO, Bank of Commerce, PBCOM, and UCPB offer FXTNs as low as P100,000; Chinabank at P200,000; Allied Bank, Metrobank, and PNB starts at P500,000; and Metrobank starting at P1,000,000
For US-Dollar denominated ROPs, minimum starts at $10,000 for Planters Development Bank, with PNB starts at $25,000. Chinabank, Veterans Bank, and UCPB offer a minimum of $50,000, while PBCOM is at the higher end of $100,000.
How to earn
The investor can earn from GS in two ways: either by holding on to maturity or selling. The simplest way to earn is by the former, with the latter a bit more complicated. Remember that bonds have coupon payments, basis of which is the face value. To refresh, imagine a bond worth P100,000 face value with a coupon payment of, let’s say, 5%, payable annually for five years. For an investor buying on issuance date, this means that every year, he gets P5,000 (5% of P100,000) every year for the duration of five years’ life of the bond, plus the face value of the bond, which is P100,000. This is the simplest way to earn from bonds. Buy, hold, and wait for the coupon payments and the face value upon maturity.
But bond interest rates vary almost every issuance. And with new issuances come differences in the interest coupon figures from the year prior. From the foregoing example, let’s say that the year after the issuance of the 5% coupon bond, a new bond is issued at 10%. As an investor, you would not want to remain with a lower-yielding instrument. You would want to sell your bond in exchange for a higher-yielding one. But no investor would want to buy a lower yielding one such that you would sell your bond at hand at a lower price than originally purchased—at a discount. Similarly, if the tables have been turned, the one with a higher-yielding bond would be able to sell his bonds more than what he paid for—since buyers would be willing to exchange their low-yielding instrument at a higher one. This is called selling at a premium.
Since bonds are very liquid instruments and are readily tradable, the client can sell the security any time at the prevailing market interest rate. The prevailing rates, however, change daily according to the movements of the market. As a rule of thumb, investors should check the trend of interest rates. Increasing interest rates are not good for bondholders that bought in at low rates; falling interest rates, on the other hand, makes the bondholder happier and may cash in on their gains through trading. The Web sites of Bangko Sentral ng Pilipinas (www.bsp.gov.ph) and National Statistical Coordination Board (www.nscb.gov.ph) offer statistical trends of interest rates as well as forecasts in order to help the investor.
On a final note, it is recommended that the prospective investor check with the dealer the indicative rates of the instrument. Indicative is the term used because while GS offer fixed returns, yields to maturity (YTM) often change according to market conditions. Moreover, check the taxes charged on interest income. There is a 20% withholding tax on interest income for peso-denominated bonds while ROPs are not subject to tax. Also, management fees are charged so that prospective investors must check the indicative yield to maturity net of taxes and fees for a clearer picture of the return.
91-Day Treasury Bill Rates
Updated 24 November 2008
LATEST: 5.69 % (July 2008)
HIGH: 15.8% (November 2000)
LOW: 4.4% (May 2002)
|T-Bill Rates, 1999-2008|
|10.2||9.86||9.86||5.43||6.03||7.34||6.36||5.35||3.41||3.67||not avail.||5.7||not avail.|