Should you put money into the government’s latest retail dollar bonds?
There is excitement surrounding the recent bond offering of the government. We recommend buying only if you are comfortable holding the bond until maturity.
It’s easy to get excited and follow the herd when the government offers something new for retail investors.
Last September 27, the Bureau of Treasury (BTr) successfully raised USD 611.2 million upon the issuance of a new 5.5-year Retail Dollar Bond (RDB). It is confident that it will exceed USD 1 billion when the offer period ends this Friday, October 6.
Here’s what makes it attractive.
The RDB coupon interest rate is set at 5.75% per annum, payable quarterly, and is tax-free. For reference, the indicative yield on the 5.3-year Republic of the Philippines (ROP) 29 bond is 5.285% while the 5.6-year peso-denominated Fixed-Rate Treasury Note (FXTN) 7-67 is 5.096% net of 20% withholding tax.
This means the RDB has a spread of 46.5 basis points and 65.4 basis points over the ROP 29 and FXTN 7-67, respectively. That is, it offers a higher yield.
We also think the RDB should have additional spread over its ROP counterpart, since RDBs tend to be highly illiquid in the secondary market. The reason for this is that RDBs were targeted at OFWs and other local investors with excess US dollars who will likely hold these bonds until maturity.
Some things to consider:
- US rates are at their highest levels in 16 years. While we wait for better direction given different catalysts and signals, assume we are in for a volatile period. This may be the best time to lock in higher-for-longer US rates.
- When was the last time a 5.5-year ROP was issued with at least a 5% coupon? In recent years, ROP 27NEW falls into that category, with a coupon rate of 5.17%, but earlier than that, it has been a while. It is also rare for a US dollar-denominated bond to yield higher than a peso-denominated bond.
Again, we stress that this RDB is more suitable for clients with excess US dollars who want more exposure to the Republic of the Philippines and are comfortable holding the bonds until the maturity date.
This is not for clients who are into trading and profiting from the price differences in bonds. While the RDB can be traded, because its market is expected to be illiquid, investors may encounter unattractive prices compared to more liquid bonds.
If you wish to act on this opportunity, get in touch with your Metrobank relationship manager or investment specialist. Get more from Metrobank Wealth Insights by bookmarking our website and visiting us regularly.
EARL ANDREW “EA” AGUIRRE is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years 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