treasury bonds?

Question

I live in Southeast Asia and in the country where I'm in the rate for Small Denomination Treasury SDT- bonds are currently 13.625%p.a.
I am considering putting some money into it. would it be wise to do so? What are the risks in investing in treasury bonds?

the currency of the bonds are Peso the local currency of the Philippines. I'm totally new at investing but really interested to know about it.
Thanks!

Answer 1

Which nation's treasury are we talking about? The bonds are safer if a nation has strong powers of taxation.

Which currency are the bonds denominated in? This is very important from an economic point of view, but an explanation could run for many pages.

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Any investment will have a return equal to:
(1+inflation%)*(1+real interest%)*(1+risk%) = (1+return%)

Inflation is a simple concept so I'll skip that.

Real interest rate is a % that you need to earn even if you are CERTAIN that you will not lose money. Without that return you would prefer to spend your money today. This is a very constant number, and has weak a connection to American culture. Japanese prefer to people save more and do not need such a high minimum %.

Risk premium is additional return you would need for risker investments. A computer company bond would have a higher risk premium than a government bond.

Now I will apply this to a US 91 day T-Bill because that is the basis for ALL investments at most large banks.

(1+.0257)*(1+.0202)*(1+0.000) = (1+.0464)

- Inflation in the US is (a reasonable) 2.57% according to InflationData.com
- Real Interest in the US is 2.02%
- Risk of the US Treasury is defined as 0% in finance
- Return on the Treasury Bill is 4.64% according to Yahoo


Now compare these numbers to the Filipino Peso:

(1+.0240)*(1+.0200)*(1+???) = (1+.13625)

- Inflation is 2.4% according to http://www.census.gov.ph/
- Real Interest probably 2%
- Risk of your treasury is ???????
- Return on the SDT is 13.625%

If you turn the equation around, you will see that the risk premium is 8.79%. That means that you have a fairly risk investment, considering that US bonds are 0%.

The reason for this is that if there is another economic crisis like in 1998, then business will not make profits and the government will have nothing to tax. If they cannot tax, they cannot repay loans, and you get 0% instead of 13%.

I don't know what options you have in the Philippines, but if you are not comfortable with the risk compared to the return then you should keep the money in a bank account. The stock market is almost always riskier than bonds. Right now, Filipino bonds are about as risk as American stocks.

Another safe thing to do is change the Pesos into Dollars and buy the US bond. However, this is very hard unless you have millions of Pesos because there are so many fees and laws.

I hope this helps.

Answer 2

There are a couple of risks:

is the inflation in the Phillipines greater than 13.625%, if so the bond will lose purchasing power

can the Treasury be expected to repay the bond in a time of stress

how long til the Treasury has to come up with the principal and return it to you

how do you get out if you change your mind and what are the costs

if you add up taxes and inflation does your bond make a profit

are you expecting to need the money early