One of the sources of passive income available to Pinoys is by investing in retail treasury bonds (RTB). But what is it? For many of us, particularly those who are just starting to learn about investing, it might be one of those things that are not particularly well-known.
In this article, I’m going to talk about how the retail treasury bond is made available to anyone, why it can be an alternative way to earn extra from your savings, and the latest RTB offering by the government.
What is an RTB?
Retail treasury bonds (RTB) are issued by the Bureau of the Treasury (BoTR) under the Department of Finance in order to raise funds to be used by the Philippine government. They are a proof of debts. The government borrows money by selling the bonds, and you buy them by paying the face value (the amount that the bond is sold).
In return, you can earn through the interest that is paid quarterly. The interest, which is subject to 20% tax, is deposited at the bank account that you declare as your settlement account. By the time the bond matures, the government returns the investment by paying back your capital.
How does the government use the money?
The money that is collected through the sale of government bonds are used to become part of the country’s treasury. They can fund road, bridge and other infrastructure projects, social welfare, education, poverty alleviation programs, etc. The government may also spend it on public services such as healthcare, police, fire department, and national defense. It may be used to pay the country’s debts.
What are the benefits of retail treasury bond?
What are the pros and cons of retail treasury bond? There are many advantages when you invest in RTB.
- Safe. Government bonds in general are considered safe. They’re guaranteed by tax-payers, so the risk of a default (the inability of the state to pay back its debts either through your capital or interest) is arguably low.
- No extra costs. No fees and other charges.
- Periodic income. Interest is divided into quarterly payments straight to a bank account. It can benefit people who need predictable income stream such as students, retirees, etc.
- Higher rate. The interest that you receive is higher than cash deposits in savings account or time deposit offered by the banks.
- Capital preservation. Retail treasury bonds appeal to conservative investors. They can be a means to preserve your money. There is less risks in losing capital than compared to the more aggressive equities or index funds.
- Diversification. They are a good way to manage your risk exposure in your investment portfolio.
- Nation-building. When you buy RTBs, you are lending money to the government. In a way, you’re helping out the country for a better future.
- Most RTBs can be exchanged. It is an option for people who would want to exchange their maturing bonds with new issuance.
What are the disadvantages of retail treasury bond?
What are the drawbacks, negative effects or risks in investing in Philippine government bonds?
- Some RTBs cannot be exchanged or traded. Most RTBs can be exchanged, but the Premyo bond is not transferable.
- Lock-in period. There is a lock-in period of one year. You can’t get your money back within that length of time. This can be an issue in emergency situations or when you need to use your money.
- Non-transferable. The ownership of the bond units, once purchased, cannot be transferred to someone else. It is assigned to you for the whole duration of the lock-in period.
- Interest rate risk. When there is interest rate hike, it might not be attractive to hold on to RTB particularly when the new rate offered is higher than the RTB’s returns.
- Opportunity cost. Another disadvantage is that its interest may be low compared to investments that have higher risk but also higher returns such as stocks or equities fund. For example, in 2019 the highest UITF fund, which is an equities fund, posted gains in excess of 30%.
- Taxable income. Your gains are taxed at 20%.
Why should you invest in retail treasury bonds?
In investing, there is nothing that can be considered without any risks. RTBs are the closest that can be regarded as a safe investment instrument. Concerns for not acquiring them would appear when there are indications that the government is going to default on its obligation.
Latest retail treasury bonds
Before we talk about the RTBs that you can invest, it is important to understand how they are being offered and acquired. There are two ways that the BTr issue them: through auction and through direct investment.
When RTBs are offered through auctions, ordinary investors can’t get them directly. Instead, they are up for bidding to institutional investors like banks, mutual funds, etc. And it is up to these companies to offer them to the public. Here are the treasury bonds up for auction. You can also see the auction’s result on the BTr website.
Through direct investment
Another way to acquire them is by direct investment. They are made available to the investing public who can either invest directly through BTr’s website or through authorized selling partners.
Here are the latest retail treasury bonds from the Bureau of the Treasury. Since last quarter of 2019, there have been two issuance: Premyo bonds and RTB 2020. Lately, the government has just announced the newest offering RTB-24.
|Offer period||July 16, 2020 – August 7, 2020||January 28 to February 6, 2020||November 15 until December 13, 2019|
|Issue date||August 12, 2020||February 11, 2020||December 18, 2019|
|Maturity||August 12, 2025||February 11, 2023||December 18, 2020|
|Tenor||5 years||3 years||1 year|
How much can you earn from retail treasury bonds?
RTBs have simple interest. What you get through interest is fixed and predictable year on year. Unlike savings accounts and time deposits, they do not compound. On the other hand, compounding allows earnings to increase more because the computation is based on how long the account is active and any previous interest get added to your capital, which would then become the basis when computing for future interest.
Nevertheless, how much money you can make depends on the term, the declared interest, the capital and tax. In the table below, you can see varying interest from 2% to 8% for a one-time capital of ₱1 million in 10 years. The amounts that you see here already include the 20% tax on earned interest. The last two rows shows cumulative gain (which is sum of all interest that are paid out divided by the capital) and the total earnings.
Again, it’s important to remember that this is just a math estimate. Actual returns vary, and the table below does not guarantee that what you get when you invest would be the same.
How can you invest in retail treasury bond?
You can invest in RTBs during its offer period through online or through authorized partners via over-the-counter (OTC) transaction. For online, investors just went to Bureau of the Treasury website with a settlement account already opened with partner banks and investment houses.
For over the counter, investors just have to drop by any of the selling agents. The selling agents are companies like banks and investment houses that the Treasury authorized to sell the bonds. The list would vary with each offering.
However, if you’ve missed it during the offer period, there are two ways. One, you can purchase them through the secondary market at the Philippine Dealing and Exchange Corporation through licensed brokers such as banks and investment houses. You can read the how to trade fixed income in PDEX.
Two, you can always open a bond fund through mutual fund, unit investment trust fund (UITF), Personal Equity and Retirement Account (PERA), or variable universal life (VUL) policy. The bond fund however does not necessarily include any of the RTBs mentioned here, it is up to the fund manager what securities to acquire.
Regardless of how you purchase, the following are the common steps that you need to do in order to invest in retail treasury bonds.
- Prepare at least one valid ID and a bank account at any of the participating banks. The bank account is going to be used as your settlement account where the interest and the capital (after maturity) would be deposited.
- Go online or drop by at any branches of any partner institutions.
- Fill out the forms.
- Pay the starting capital. You may also opt to increase it by observing the required increments.
- Make sure that you monitor your account from time to time.
- Check the Bureau of the Treasury website regularly for any upcoming offerings.