Long-Term Negotiable Certificate of Deposits - Why LTNCD Investing in the Philippines Makes Sense

If you’ve got money to invest right now, you may be thinking the stock market is your best bet. I can’t blame you. The Philippine stock market is soaring to unprecedented heights nowadays. Right now the Philippines Stock Exchange Index (PSEi) is hovering at the 5600 mark. Not only is that a record high for the PSE index, it’s also a 36% increase from a year ago.

It’s natural to look at that performance and be enticed to get in immediately. Investors, after all, want the best return for their money. That’s why a good stock market performance can easily shoot up to become so much better. Investors see results and use that to justify buying more stocks. It’s easy to imagine how this phenomenon can result to overpriced stocks when the demand keeps rising.

Manic-Depressive Stock Market

This tendency of the market to wrongly appraise the value of stocks is the reason why investing in stocks is quite risky. I cannot say for sure that it’s wrong to invest now in stocks. I’m not that good to say that. What I’m proposing is to make sure that you’re not investing just because the market is going up. That would make you a speculator which can be dangerous for your money.

Furthermore, the volatility of the stock market is quite high. It means we can’t predict with certainty where it’s going. That’s why the experts caution for investors to diversify. They say we shouldn’t put all our eggs in one basket. For some, it means investing in many companies. But it also means having a mix of high-risk and low-risk investments.

Mitigating Your Risk

Low risk investments, such as bonds, should form part of our overall investment portfolio. Since bonds are debt instruments, they are relatively low risk. According to the Intelligent Investor, bonds should be between 25% to 75% of total investment. This arrangement will counterbalance the possible significant loss in stocks in case market condition deteriorates.

But if you look at bonds lately, yields are quite unattractive. In fact if we use the government bond with 5-year tenor as benchmark, it's so low that we might as well invest in something else. The yield is actually at around 3.8% for this type of bonds according to

Additionally, the most recent treasury bond auction (for 7-year tenor) of the government pegged the yield at 3.875% a year. With a 20% withholding tax on interest income for bonds, that would put the return on investment at a measly 3.1%.

LTNCD’s vs Government Bonds

All of that leads us now to consider a bank deposit product called the Long-Term Negotiable Certificate of Deposit or LTNCD for short. That’s because this type of investment has been offering relatively better yields compared to government bonds for the same maturity.

From its inception in 2001, LTNCD’s have been offered by banks to investors to improve their own financial management. So to understand LTNCD’s better, the first thing to know is that these are bank deposit products which means the following:
  • these are offered by banks and regulated by the Banko Sentral ng Pilipinas
  • these are insured up to 500,000 pesos by the PDIC
  • similar to bonds with fixed maturity (minimum of 5 years)
  • interest earnings are tax-free (unlike bonds with 20% withholding tax)
  • can be bought and sold at a secondary market prior maturity
These characteristics make LTNCD’s seem very similar to time deposits since both are deposit products. Although LTNCD's have better interest rates due to longer maturity. Moreover, tax-free earnings make LTNCD’s more attractive than government bonds.

Current Winner

But the real selling point of LTNCD’s over bonds is their comparably better yields. A recent interview reported in with a UCPB (United Coconut Planter's Bank) executive revealed that you can earn 5.75% annual interest on LTNCD’s from the secondary market.

I understand that for some aggressive investors, 5.75% is not enough. But if you compare that to a 7-year treasury bond that will net you with an annual 3.1% earning, LTNCD’s are way better.

Photo Credit: PHBascon (Creative Commons)