2.3 · Bonds and the peso ladder
Why this lesson
Section titled “Why this lesson”You already own bonds — you just bought them the way a beginner does. Lesson 1.4 had you buy an RTB at issuance and hold it like a time deposit with a better rate. That works, and for much of your guaranteed layer it will keep working. But the moment you hold a bond someone might sell — or a bond fund inside a UITF, PERA menu, or your future 2.6 allocation — you need the two ideas this lesson installs: yield to maturity (what a bond actually pays from today’s price, which is not its coupon) and duration (how hard its price swings when rates move). Without them, 2022’s global experience — “my safe bond fund is down 15%??” — arrives as a betrayal. With them, it arrives as arithmetic you saw coming.
The second half assembles the skill into the course’s quiet workhorse: the peso ladder — maturities spaced one per year across RTBs, FXTNs, time deposits, and your MP2 accounts, so that every year some principal comes home at face value and gets redeployed at whatever rates then exist. It’s the structure that lets your guaranteed layer pay steady income without ever forcing you to sell a bond at a bad price — the fixed-income version of never being a forced seller.
A PensionCraft pair — the clearest bond mechanics on YouTube. Translation note before pressing play: Ramin is British. Every time he says gilts, hear RTBs/FXTNs; the Debt Management Office is our Bureau of the Treasury (auction calendar at treasury.gov.ph); ISA/SIPP tax wrappers have no PH equivalent — our nearest shelters are MP2 and PERA; and his rating agencies (Moody’s/S&P/Fitch) map to PhilRatings for local corporate issues. The mechanics — price, coupon, YTM, duration, ladders — transfer without modification.
Watch for:
- 02:21 — single bond = certainty of income, maturity, and YTM if held; a fund has none of the three.
- 04:37–08:20 — sponsor note: a ~2-minute plug for Lightyear (a UK platform, not available in PH) sits inside the money-market chapter. Skip it; nothing teaching is lost.
- 11:19 — duration as “the single most important number” for a bond fund: rate change × duration ≈ price change.
- 15:07 — “why did my bond fund lose so much money?” answered properly: duration exposure, not a broken product. The same math governs every PH bond UITF.
- 18:28 — corporate credit spread = payment for default + illiquidity risk; the investment-grade/junk cutoff.
Watch for:
- 01:47 — the bond lifecycle: issued at par (100), pays its coupon, repays face value at maturity — RTB/FXTN mechanics exactly.
- 08:22 — a worked YTM calculation: coupon income plus pull-to-par capital gain, combined into one annualized rate.
- 12:36 — why a fund can’t replicate a ladder: forced selling at the fund’s maturity boundary surrenders the certainty you were buying.
- 16:04 — he builds his ladder from the DMO bond list; you’ll build yours from the BTr auction calendar and the PDEx secondary market via a GSED broker or Bonds.PH (lesson 1.4’s term: there is no PH self-serve TreasuryDirect).
Price, coupon, and yield to maturity
Section titled “Price, coupon, and yield to maturity”A bond is a loan with three fixed numbers: face value (what’s repaid at maturity — quoted as 100, “par”), coupon (the fixed annual interest on face value — lesson 1.4’s term), and maturity date. What is not fixed is the price someone will pay you for it in between, and that one moving part creates the whole subject.
Say the Treasury issued a 5-year bond at par with a 6% coupon, and a year later fresh bonds pay 8%. Nobody will pay you 100 for your 6% bond when 8% is on the shelf — its price falls (to roughly 93–94) until a buyer earns the same 8% overall: 6 in coupons plus a pull-to-par gain from 94 to 100. That all-in annualized rate — coupons plus the capital gain or loss to maturity, at today’s price — is the yield to maturity (YTM), and it is the only honest price tag a bond has. The coupon tells you what the bond pays on paper; the YTM tells you what you will earn from here. When you browse the PDEx secondary market through a broker, YTM is the number quoted, and the bid-ask spread — the gap between what dealers pay and charge — is the retail-size friction cost (wider for small lots and odd issues; another reason the default plan is holding to maturity, where the spread never touches you).
Two conclusions fall straight out. First, bond prices move opposite to rates — mechanically, not psychologically. Second, the loss only exists if you sell: held to maturity, the bond pulls to par and pays exactly the YTM you bought. Volatility in between is real for sellers and irrelevant to holders — the same volatility-vs-permanent-loss distinction as lesson 1.8, with a mathematical guarantee attached (for government credit, at least).
Duration: the rate-sensitivity dial
Section titled “Duration: the rate-sensitivity dial”How much does a bond’s price move when rates move? That’s duration — expressed in years, used as a multiplier: price change ≈ −(rate change) × duration. A duration-2 bond loses ~2% when yields rise one point; a duration-15 bond loses ~15% on the same move. Longer maturity and lower coupons mean higher duration — more of the money arrives far in the future, where rate changes bite hardest.
This is the number that explains every “safe fund fell 15%” story of 2022: long-duration bond funds behaved exactly as their duration said they would when rates jumped. It’s also a dial you choose: short-duration holdings barely notice rate moves and pay accordingly; long-duration holdings pay more (usually) and swing like equities-lite. For the guaranteed layer of your portfolio — the sleeping-well layer — the course default is short-to-medium duration, matched to when you’ll actually need the money. Matching maturities to needs is precisely what the ladder below automates.
The fund-versus-bond distinction now has teeth. A bond fund (or bond UITF) holds hundreds of bonds and never matures — it continuously sells bonds as they age out of its mandate and buys new ones. That buys you diversification and convenience, at the price of all three certainties: no known maturity value, no locked YTM, permanent duration exposure. Neither is “better” — but they are different instruments wearing the same name, and PH bank staff routinely sell bond UITFs to depositors as if they were time deposits. Now you know the question to ask: what is this fund’s duration? If the answer isn’t in the fund fact sheet (it usually is), the seller doesn’t know what they’re selling.
Credit: the other risk axis. Everything above assumed the borrower repays. For the Republic of the Philippines borrowing in pesos, treat that as the local risk-free benchmark (it can print the pesos it owes you — the real risk is inflation, not default). Corporate bonds — Ayala, SMC, banks — pay a credit spread above government yields as compensation for default and illiquidity risk, and credit ratings (PhilRatings locally: PRS Aaa down the scale) grade that risk. The 1.8 rule applies verbatim: the extra yield is payment for risk you now hold, and a corporate bond yielding 2 points over the FXTN curve is telling you something the issuer’s brochure won’t. For Level 2 sizes, the course position is plain: the guaranteed layer stays in sovereign credit and PDIC-insured deposits; corporate credit is optional seasoning, never the base.
And always net the tax. All coupon interest — RTB, FXTN, corporate — is hit by the 20% final withholding tax (lesson 1.1’s oldest lesson), and since CMEPA took effect in July 2025, so is every time-deposit rung regardless of term — the old 5-year-plus tax-exempt certificate no longer exists, so ladder for maturity structure, never for a tax break. The RTB’s 6.00% gross (4.8% net) is the current worked example. MP2 (7.12%) pays tax-free, which is why it keeps outscoring higher-gross instruments in scorecards, and why your ladder will treat MP2 maturities as first-class rungs.
The peso ladder, assembled
Section titled “The peso ladder, assembled”A ladder is maturities spaced evenly through time: five rungs, one maturing each year. Why practitioners bother:
- No forced selling, ever. Money you’ll need in year N sits in the rung maturing in year N, redeemed at face value. Rate swings between now and then are scenery.
- Reinvestment risk, averaged away. Reinvestment risk is the mirror image of price risk — the danger that money coming due gets reinvested at worse rates. A ladder redeploys one-fifth of the layer each year at whatever rates exist: never all-in at a top, never all-out at a bottom. It’s DCA for fixed income.
- A real income stream. Coupons arrive quarterly (RTBs) or semi-annually (FXTNs) across the rungs, while the annual maturity gives you a no-penalty decision point: redeploy, rebalance into 2.6’s allocation, or spend.
The PH rung inventory: RTBs at issuance (₱5,000 minimum via banks/Bonds.PH — roughly annual offerings, oversubscribed for a reason), FXTNs on the secondary market via a GSED broker for the tenors RTB timing doesn’t cover, time deposits (Tonik at 5.5% and peers, PDIC-insured within the ₱1M ceiling) for 6–18-month rungs, and — the PH-specific move — MP2 laddering from lesson 1.4: an account opened each year means a tax-free 5-year rung maturing every year from year five onward. A mature version of this layer often ends up as MP2 accounts as the long rungs, RTB/FXTNs in the middle, time deposits at the short end — every peso PDIC-insured or sovereign, every maturity chosen on purpose.
Build rules the course endorses: match total ladder size to the guaranteed layer 2.6 will assign (not more — this layer defends; the index compounds); ladder net-of-tax yields, never gross; and write each rung’s maturity date and planned use in the tracking sheet. A ladder you can’t state the purpose of is just a collection.
Design the ladder on paper before moving a peso:
- Inventory the raw material. List every guaranteed-layer asset you own with its maturity date: MP2 accounts (year opened + 5), RTBs, time deposits, idle cash beyond the emergency fund. Lay them on a 5-year timeline and look for the gaps and the clumps.
- Design five rungs. For each of the next five years, assign or plan one maturing instrument. Fill gaps with the menu above — e.g., an 18-month Tonik TD for year 2, the next RTB offering for year 5, an FXTN quote from your broker for an awkward middle year. For each rung write: instrument · amount · gross yield · net yield after 20% final tax (or tax-free) · maturity date · planned use at maturity.
- Compute one secondary-market YTM by hand (the video’s 08:22 method) on any FXTN quote you can get — Bonds.PH or your bank’s treasury desk will give you a live price. Coupon income + pull-to-par, annualized. Once you’ve done it once, no bond salesman can ever quote you “6% coupon!” on an above-par bond again.
- Stress-test your longest holding: if its yield rose 2 points tomorrow, estimate the paper loss from duration (≈ 2 × remaining years, roughly) — then write beside it what you’d actually do: nothing, it matures in year N and is spoken for. That sentence is the whole lesson.
Check yourself
You hold a 6%-coupon bond and market rates rise to 8%. What happens, and what does a buyer at the new price earn?
A bond fund with a duration of 7 faces a 1-point rise in yields. Roughly what happens to its price?
The three certainties a single bond gives you that a bond fund cannot are:
Why does a ladder neutralize reinvestment risk?
An RTB pays 6.00% gross. After the 20% final withholding tax, and versus MP2's tax-free dividend, the honest comparison is:
A corporate bond yields 2 points more than an FXTN of the same tenor. That spread is:
You can move on when… you can explain why prices fall when rates rise without reciting it, quote a bond by YTM instead of coupon, state your longest holding’s rough duration and why you don’t care (it’s held to maturity, on purpose), and your five-rung ladder design exists with net-of-tax yields and a planned use per rung.
Go deeper
Section titled “Go deeper”Primary sources worth bookmarking: the Bureau of the Treasury auction calendar for what’s being issued and at what yields, and Bonds.PH for retail access. Your bank’s GSED desk (lesson 1.4) will quote FXTN secondary prices on request — asking is free and educational.
Next: 2.4 · Yield is not free money — the sleeve is built on honest yields; now the inoculation against the engineered kind: covered-call ETFs and every 8–12% headline number that arrives by social media.