Our new column, Ask Your Advisor, is all about the most common questions asked by our high-net-worth clients.

You may have the same questions, too. Our goal with this column is to help expand your knowledge and deepen your understanding of financial tools and concepts that will help grow your wealth.

So, let’s dive in. I get asked this question often: Which is better, peso-denominated bonds or asset swaps?

Peso-denominated bonds can refer to government securities or corporate bonds. In this transaction, everything is denominated in pesos.

However, there may be opportunities outside the Philippines that some high-net-worth individuals may pursue. They include bonds denominated in US dollars or some other currency, perhaps Japanese yen or euro, issued by various global institutions and even sovereign governments.

If a client wants to buy a dollar-denominated bond that will mature in five years, he should ideally have some dollars on hand. Most of the time, however, our clients’ funds are in pesos. They may not be in businesses that naturally generate dollars.

Managing forex risks

So, the first step is to buy dollars. Now the bond will pay interest in dollars, too. And after the bond matures in five years, the bond will also pay the principal in dollars. While some clients are OK with holding dollars, some would like to have them in pesos.

Therein lies the risk when you convert back to pesos. The exchange rate is always moving. There are many points of foreign exchange price risk.

The asset swap is meant to mitigate that risk. It is a structure that involves simultaneously buying a foreign currency-denominated bond and entering into a derivative will lock in the exchange rate for all the components of the bond transaction – from buying the bond, collecting interest, and redeeming the principal.

Is an asset swap always better?

An asset swap can be an effective way for clients with only pesos on hand to expand their investment universe and diversify their bond holdings. Of course, it all depends on what the client needs and the careful assessment of prevailing market conditions.

Clients are encouraged to hold the asset swap until maturity as early termination may result in potential mark-to-market losses. On the other hand, an ordinary peso-denominated bond can be traded on the secondary market, provided that there is a ready buyer.

But for clients who specifically want to hold their investments to maturity, we encourage exploring and comparing both peso-denominated bonds and asset swaps.

Since both products have their own separate markets, one may offer potentially higher returns than the other. In Metrobank, we give our clients seamless access to these products.

We hope you learned something new today. It is always advisable to consult your investment advisor when exploring investment options.

In our next release of Ask Your Advisor, we will feature more questions like this.

(Bookmark and visit Metrobank Wealth Insights at www.wealthinsights.ph daily for investment insights and ideas. If you are a Metrobank client, please get in touch with your relationship manager or investment specialist for assistance in accessing exclusive content. Not a client yet? Please sign up here so you can begin your wealth journey with us.)

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.