When the conflict in the Middle East started last March, we immediately told investors in Philippine peso bonds to “stay defensive” by sticking to short-term instruments and an average portfolio duration of 2-5 years. But what does time have to do with investing defensively?
“Duration” is a term that often gets brought up in our bond articles. It’s not just a measure of time. Without getting too deep into the math, the longer the duration of a bond, the more sensitive its price is to changes in interest rates.
Case in point, higher oil prices have driven up the cost of goods and services. This has caused local inflation to breach the Bangko Sentral ng Pilipinas’ (BSP) 4% upper bound target and influenced the central bank to hike its policy rate back to 4.5%, as of this writing. Investors now expect more rate hikes and demand much higher returns on bonds, causing prices to fall and yields to rise to levels last seen in 2022.
In a rising interest rate environment, it is generally recommended to invest in short-term instruments. This strategy allows an investor to take advantage of potentially higher returns as newly issued instruments adjust to interest rate hikes. Common ways of expressing this strategy are to place in time deposits and government treasury bills, which are available in maturities up to a year.
A money market unit investment trust fund (UITF) is also an innovative product that pools investors’ money. Some UITFs invest in a diversified portfolio of time deposits and treasury bills. What’s important is that the weighted average duration of the money market fund is a year or less in order to minimize the impact of market volatility.
Playing defense doesn’t mean completely avoiding all forms of longer duration. While short-term instruments can quickly adjust to interest rate hikes, they also tend to be lower yielding when compared to longer-dated bonds across the curve.
By choosing to invest in bonds with an average duration of 2-5 years, we are attempting to strike a balance between better returns and minimal potential downside, should bond yields keep increasing.
This strategy can be expressed by investing in Retail Treasury Bonds (RTB) and Fixed-Rate Treasury Notes (FXTN). Both are types of bonds issued by the Bureau of the Treasury (BTr).
The core difference is in the frequency of coupon interest payments – RTBs pay quarterly while FXTNs pay semiannually.
Markets can be unpredictable. Up to February of this year, the BSP had been cutting interest rates, and we had anticipated bond yields to keep moving lower. But because of trouble in the Middle East, we are once again hearing talks of interest rate hikes and seeing a rapid rise to bond yields.
Maintaining a defensive stance in peso bonds allows investors to mitigate interest rate risks while remaining nimble enough to take advantage of potentially better investment opportunities.
For investors looking to implement a 2‑ to 5‑year duration strategy in a more convenient and diversified way, fixed‑income‑oriented UITFs offer a practical solution. Many institutions offer this. One such UITF is the Metro Unit Paying Fund, which invests in a diversified portfolio of government securities, corporate bonds, and equity preferred shares.
The fund is designed to provide regular income through quarterly payouts, while maintaining an average portfolio duration aligned with a defensive stance. As of March 31, 2026, the fund’s average duration stood at 3.43 years, comfortably within the targeted range.
Investors on record as of May 15, 2026 will be eligible to receive the next payout scheduled on May 18, 2026. Just be wary that the fund may not exactly track the performance of peso bonds due to its partial equity component.
If you are a Metrobank client and want to know more about this strategy and other local fixed income solutions, please reach out to your Wealth Specialist. For more information on UITFs, visit your nearest Metrobank branch or send an email to uitf.central@metrobank.com.
EARL ANDREW “EA” AGUIRRE is the Head of the Investment Counselor Department under the Financial Markets Sector of Metrobank. He has more than a decade of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.
