According to National Treasurer Omar Cruz, "as we attract foreign investors to buy peso government bonds, the larger supply of capital will force interest rates down."

The government plans to exchange old debts totaling P874 billion for short-term loans as a debt consolidation scheme. The move, officials are hoping, would jumpstart the local debt market and also reduce the country’s dependence on foreign funds.

Cruz said liquid benchmarks would ease the pressure on interest rates. "With the BTr (Bureau of Treasury) plan to create benchmarks with a minimum size of P20 billion, investors should be willing to accept lower yields." This was also the experience of the government in its US dollar-denominated borrowing program, prompting it to concentrate issuance in a handful of large issues in excess of billion.

The BTr chief also expects demand for other issues, such as Retail Treasury Bonds to pick up. In the past demand for RTBs have reached as high as P50 billion.

Bank deposits are also expected to find its way to government securities investing, Cruz said.

He explains that the more transparent pricing process becomes (due to Fixed Income Exchange) and with a liquid secondary market among the benchmark issues, this would make government securities more attractive than bank deposits, which tend to be shorter in tenor because higher yields come with longer maturities.

"Once you have removed liquidity of medium to long term government securities as a concern, the funds should flow in," he added.

Under the debt consolidation program, investors who currently hold Philippine government securities would be invited to exchange them for new, liquid benchmarks issues with 3, 5 and 7-year maturities. The 3, 5 and 7-year bonds will have a minimum issue size of P30 billion, P25 billion and P20 billion.

Cruz said earlier that the bond exchange has been done before and provided liquidity to bondholders of Philippine sovereigns. When completed, about 90 different series of bonds will be cut to just three.

This is if the government swaps three-year series for just one debt instrument. In the meantime, five- and seven-year peso bonds will be swapped the same way.

The bond exchange is considered a debt management exercise, which ultimately meant savings on interests the government pays on its past loans. "This will be value-neutral but the simplified state will make the market very liquid," Cruz said.

The government first embarked on an exchange of its IOUs in 1996 under the so-called Brady bond framework where the country’s foreign debts with commercial creditors were swapped for new ones.

Brady bonds were named after US Treasury chief Nicholas Brady who engineered a debt reduction program for emerging markets like the Philippines by backing up their sovereign issues with zerocoupon US Treasury IOUs.

Presently there are are 32 different series of 3- and 5-year bonds outstanding with a face value of P293 billion. A total of P92 billion of 5-and seven-year bonds were issued in 11 different series.

In the meantime about 47 different bond series maturing from one to three years have a face value of around P500 billion.