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One of the best source 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 RTB offering by the government through the Premyo bond last December 2019.
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 also decide to use the proceeds to pay national 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
Here are the latest retail treasury bonds from the Bureau of the Treasury. Since last quarter of 2019, there have been two issuance. Premyo bond is described below, while you can read this article about RTB 2020 for more information.
|RTB 2020||Premyo Bond|
|Offer period||January 28 to February 6, 2020||November 15 until December 13, 2019|
|Issue date||February 11, 2020||December 18, 2019|
|Maturity||February 11, 2023||December 18, 2020|
|Tenor||3 years||1 year|
Most of the government bonds are sold to institutional investors such as banks and investment houses. They usually require significant capital and involve participating in an auction to bid for them. RTBs meanwhile are made available to the investing public, so they usually are priced in lesser (more affordable) amounts and anyone can invest without having to go through an auction.
The most popular example is the Premyo bond, the latest of which was offered between November 15, 2019 until December 13, 2019. Its issue date is December 18, 2019 and the term ends December 18, 2020. The public can invest for one bond unit for as low as ₱500. Each unit also entitles the holder one ticket to a raffle that is held every quarter, where 116 winners are announced and one of whom can get home with ₱1 million.
The aim of the Premyo bond program is to open investment to everyone, not just those who have big sums of money, a move that is made to achieve the government’s action plan for “financial inclusion”.
How do you earn from Premyo bond?
Premyo bond as a retail treasury bond allows you to earn 3% annual interest for a one-year term. When you include the 20% withholding tax, the effective rate is 2.4%. It is a rate that is higher compared to interest earned in savings account and time deposit.
Let us say that you have ₱100,000 capital that you use to buy Premyo bond. That should give you 200 bond units, and that is equivalent to 200 raffle tickets. With 3% interest rate, your gain is ₱3,000. After tax, the net income for your investment is ₱2,400. See the table below for the computation for a capital of ₱100,000 and ₱1,000,000.
How can you invest in retail treasury bond?
You can invest the Premyo bond 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 Development Bank of the Philippines, Landbank, or First Metro Securities Corporation.
For over the counter, investors just have to drop by Development Bank of the Philippines, Landbank, BDO Capital & Investment Corporation, and Chinabank. Their existing account can be used as settlement account.
However, if you’ve missed it during the offer period which ended December in 2019, there is an alternative. 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.