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Fixed Rate Treasury Notes (FXTNs) are direct and unconditional obligations of the national government. They are issued by

the Bureau of Treasury (BTr). They are interest bearing and carry a term of more than one year and can be traded in the

secondary market before maturity.

Fixed Rate Treasury Notes are considered one of the primest investment instruments in the market. They are safe, liquid

and offer attractive returns to investors.

Features:

Issuer : National government

Term : 2, 5, 7, 10, 15, 25 years

Tax feature : Interest income subject to 20% final withholding tax

Type of income : Tax paid income

Rate : Fixed for the life of the FXTN; based on lowest accepted yield to maturity on auction date

Coupon payment period : Payable semi-annually in arrears

Interest computation : Simple interest/add-on

Manner of purchase : Auction or through secondary market

Fixed Rate Treasury notes are issued and sold at a price equal to be face value and are redeemed at maturity for the full

face value of the instrument plus interest/coupon of the last period.

Fixed Rate Treasury NotesFXTNs are long-term financial obligations issued by the National Government which promise to pay a specific

sum of money with frequent fixed-rate coupon payments at a specified future date. FXTNs have a known

maturity and yield.

Minimum Deposit PhP 10,000.00

Term/Tenor 2, 5, 7, 10, 20 & 25 years (subject to availability)

Tax Feature Interest income subject to 20% finalwithholding tax

Coupon Semi-Annual

Interest Computation Simple Interest / Add-on

Manner of Purchase Through the Secondary Market

DocumentationConfirmation of Sale (COS) without recourse 3rd Party Custodianship

documents

LiquidityBank will provide liquidity for clients willing to sell securities subjectto prevailing market rates for the remaining tenor of the securities.

Marketing NetworkAvailable at all Bank of Commerce branches nationwide (cut-off is at

4:00 PM)

Advantage

FXTNs are guaranteed by the Philippine Government and are, therefore, virtually risk-free.

Best for

Individual and corporate clients who are looking for long-term and risk-free investment alternatives.

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The primary goal of the bond market is to provide a mechanism for long term funding of public and private

expenditures.A bond is a certificate of debt issued by a party in order to raise money. This money is repaid in annuity form until a

specified date, at which point the principal amount is repaid. A government bond is a bond issued by the treasury of

a government itself or by an agency delegated that power.

Government Securities MarketPrimary marketThe market for public money-market instruments, or Treasury bills, isthe single largest market for debt instruments in the Philippines (see Tables2 and 3). The need to finance the Philippines chronic budget deficits hascreated a highly liquid market for T-bills. This market comprises the primary and secondary markets for 91-, 180-,and 364-day T-bills, as well as

shorter-maturity cash management bills issued by the Treasury in unusually tight monetary conditions.Source: BSPTo rely less on short-term debt and to develop the capital market by

providing a benchmark for pricing private debt securities, the governmentstarted issuing floating-rate Treasury notes (FRTNs) in 1991. FRTN yieldswere set quarterly at a fixed spread over 91-day Treasury bills. The issuance of FRTNs paved the way for longer-term issues of fixed-rate Treasury notes (FXTNs), with 2-, 5-, 7-, 10-, and 20-year maturities, and provided the basis

for pricing longer-term private-sector debt. The government hopes to increase the liquidity of the market for long-

term government securities by further standardizing the tenor and regularity of issues.Meanwhile, tight monetary conditions and reduced demand for long-terminstruments during the regional financial crisis have temporarily sloweddown FXTN issues.

Apart from the Bangko Sentral, banks and nonbank private investors,such as insurance companies and wealthy individuals, are the largest holders of T-bills and other short-termgovernment securities (see Table 4).Semigovernment contractual savings institutions, such as the Social Security System (SSS) and the GovernmentService Insurance System (GSIS),are also large investors in government securities.1The private life insurance sector, fully liberalized only recently to allow unrestricted foreign

entry, is another potential source of investment funds for capital market

securities but has not yet had a substantial impact on this market, as theInsurance Commission has acknowledged.1SSS and GSIS corporate charters have only recently been amended and liberalized to relieve theseinstitutions of the burden of using their reserves for compulsory purchases of government securities. The SSShas the largest stock of government securities in its portfolio.Source: BSP (latest available figures)Table 4 Holders of Outstanding Government Securities, 19851994 (percentage of totaloutstanding government securities held)The financial crisis has complicated fiscal management by the Philippine government. The initial defense of theexchange rate in July 1997,and the tightening of liquidity in financial markets in succeeding months,

pushed up short-term interest rates, and therefore borrowing costs for the

public sector, besides drastically shortening the term structure of publicdebt. Interest rates have risen across all maturities. Yield curves for government securities have always slopedupward, indicating that the yieldcurve does not always reflect market expectations of lower short-termrates in the future. This may be because investors still attach a risk premium to Philippine government securities.The shock to the government securities market due to the regional

financial crisis, along with the contraction of the macroeconomy, reversedthe fiscal surpluses generated by the government in 1997. For fiscal year1998, the government now estimates that it will suffer a P40-billion deficit. With domestic interest rates stillrelatively high in mid-1998, the government has looked for other ways of financing noninflationary deficit

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spending. In March, the outgoing government floated US$400 million worthof eurobonds. The present administration has recently obtained a foreigncurrency loan from a consortium of publicand private banks, but hasabandoned the idea of issuing euro-denominated bonds.

Aside from exploring cheaper ways of financing the deficit, the administration is also attempting to broaden theownership base of public debt toinclude smaller (especially low- to middle-income) investors. The proposal to sell government securities in smallerdenominations in the primary and secondary markets fits in with this goal, even if primary and

secondary dealers generally prefer high minimum investments to makeup for the high transaction costs. A program launched recently by theGSIS offers mutual fund shares in T-bills and T-bonds in relatively smalldenominations; it is open to all citizens of legal age. The Treasury is also

studying options which might involve opening a separate window in government financial institutions (GFIs) for thesole purpose of selling smalldenomination (less than P10,000) T-bills.The extent of liquidity in the money market can be gleaned from Table5 which shows the volume of transactions in this market from 1990 to1997. Government securities take up a substantial share of transactions,while commercial-paper issues in the private sector have a small, albeit

growing, share. The volume of publicly issued securities as a percentageof all money-market transactions declined steadily from 1994 to 1996

Treasury bonds, on the other hand, are auctioned off every other weekusing the Dutch auction system. Under the Dutch system, all accepted470 CHAPTER 7bids with yields higher than the winning (lowest) bid are awarded the

same yield as the winning bid. Like T-bill issues, T-bond issues have alsobeen oversubscribed in the recent past.Treasury bills and bonds have been issued in book-entry or scripless

form by the BSP since 1989. Secondary trading of Treasury bills is generally liquid because of the large volume ofsecurities that have been issuedunder each maturity to finance chronic budget deficits, and because ofthe generally high demand from the private sector for risk-free shortterm government securities. At present,

secondary trades in T-bills arecleared and settled through the Registry of Scripless Securities (ROSS)

system developed and operated by the BTr.