Ask Your Advisor: Time to unwind… JPY/PHP asset swaps 

We’ve all been there – thinking whether it’s time to let go. This plays in different scenarios, even in investments such as the so-called Asset Swap.

The Asset Swap is one of Metrobank’s Financial Markets Sector’s innovative products. It enables clients to invest in select global sovereign and corporate fixed income securities or bonds using Philippine pesos (PHP). This allows clients to expand their investment universe and further diversify their portfolios.

In order to achieve this, the bank pairs the underlying bonds with derivative products that help determine the PHP equivalent of future foreign currency cashflows. But this also means that an asset swap is not as easily tradeable as any other standard bond.

Exiting an asset swap transaction – known as “unwinding” – involves terminating the derivative and selling the underlying bond in their respective markets. Each leg of the transaction may produce its own potential gains or losses. At worst, a client may end up with losses on both legs, which could eat into the original principal. This is why we always recommend that clients hold an asset swap to maturity to fully realize the product’s gains.

But recent economic developments may allow certain clients to unwind asset swaps on Japanese yen (JPY)-denominated bonds with minimal differences and switch to new higher-yielding asset swaps.

We start with our client Patricia (not her real name), who is part of the second-generation owners of a company. Her parents tasked her with managing their family’s investments. One of these is an asset swap on a JPY-denominated Indonesian sovereign bond (listed as INDON 1.35 25JPY) maturing on July 8, 2025. The family entered into the asset swap in October 2020, at the height of the pandemic. Since central banks around the world cut interest rates to support economic growth during this period, the asset swap’s promised return is just 3% per annum.

This frustrated Patricia to no end. Why wait until July 2025 just to realize 3% p.a. when there are other higher-yielding investment products available? Patricia approached her Metrobank coverage team for options. In our analysis, we discovered an opportunity to unwind the INDON 1.35 25JPY asset swap with minimal impact to the original return.

Part of what determines the market value of an asset swap is the difference between the interest rates of the currencies being exchanged – in this case JPY and PHP. The wider the difference between the two interest rates, the higher the potential return for new asset swaps. But it also means a higher potential loss for outstanding asset swaps held by clients.

It is important to note that when Patricia’s family entered into this asset swap, the Bank of Japan’s (BOJ) policy rate had been -0.10% for some time to stimulate Japan’s economy. Since then, the BOJ has hiked rates to 0.50%, to curb its own post-pandemic inflation. On the other hand, the Bangko Sentral ng Pilipinas (BSP) has cut its policy rate down to 5.75%, as domestic inflation remains subdued. That means the current difference between JPY and PHP interest rates has tightened to 5.25%.

JPY Yield Curve as of 28 Mar 2025

Source: Bloomberg

PHP Yield Curve as of 27 Mar 2025

Source: Bloomberg

With the INDON 1.35 25JPY bond maturing in less than four months and interest rates between JPY and PHP tighter than before, the asset swap’s market value has increased to a level just below Patricia’s original cashout amount.

Original Asset Swap Details

Source: Metrobank Treasury Group

Indicative Asset Swap Unwind Pricing as of 18 Mar 2025

Source: Metrobank Treasury Group

By performing the unwind, Patricia receives net proceeds of PHP 13,788,810.83. When compared against her original cashout of PHP 14,123,514.40, it may seem like there is a loss of PHP 334,703.57. But it is also important to factor in the coupons received thus far, which amounts to 2,075,709.44. This means that over the last four and a half years holding onto the asset swap, Patricia has earned roughly 2.74% p.a., which is not too far from the original 3% p.a. return.

After seeing our simulation, Patricia decided to push through with unwinding her family’s INDON 1.35 25JPY asset swap. For reinvestment options, we presented asset swaps on our preferred Republic of the Philippines (ROP) sovereign bonds and Indonesian quasi-sovereign / state-owned enterprise (SOE) bonds, with tenors of one to seven years. Patricia chose an asset swap on the ROP 31NEW, which will yield 5.10% p.a. for the next 6 years if held to maturity.

Patricia’s original asset swap was just in the right place and at the right time to be unwound. This allowed Patricia to exit out of a low-yielding asset swap with minimal difference and switch to a longer and higher-yielding asset swap, especially in this environment where we are expecting lower interest rates to come.

Interested in checking if there’s value in unwinding your asset swaps? Please contact your investment specialist for an indicative calculation as well as our list of recommended investment outlets.

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.)  

EARL ANDREW “EA” AGUIRRE is the Head of the Investment Counselor Department under the Financial Markets Sector of Metrobank. He has more than a decade of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

MARIA CHRISTINA “YNA” VIRTUDAZO is an Investment Counselor at Metrobank’s Institutional Investors Coverage Division. Her work involves analyzing High Net Worth clients’ portfolios and providing actionable insights and recommendations to better enhance their portfolios’ overall returns. She is a licensed Fixed Income Market Salesperson of the Securities and Exchange Commission and a certified Unit Investment Trust Fund (UITF) salesperson. She graduated with a bachelor’s degree in business administration from the University of the Philippines – Diliman. She spends her free time listening to K-pop, writing fanfiction, and watching Netflix series and K-dramas.