Asjadul Kibria |
July 31, 2021, 10:39 p.m.
As the government attempts to deepen the country’s bond market, secondary trade in government fixed income marketable securities has increased significantly over the past fiscal year (FY21). The value of the annual secondary transactions of these securities was Tk 1,377.70 billion last year, compared to Tk 594.77 billion in fiscal year 20. The value of the secondary transaction was Tk 183.10 billion Tk in FY19. The big jump in trading of these securities, a combination of treasury bills and bonds with different maturities, indicates that there is a demand for bonds or securities of debt.
T-bills are short-term government securities, while T-bills are long-term in nature. These are all debt instruments that allow the government to raise funds in the financial market. Therefore, secondary market players invest in these government-guaranteed debt securities to ensure safe returns.
However, the returns on these marketable fixed income securities have mainly declined over the past year, indicating that demand for the securities is still not adequate or optimal. This is the opposite of the global trend. The latest Annual Monetary Policy Statement (SPM) mentioned that long-term interest rate guidelines refer to the yield on 10-year government bonds, showing an upward trend in most major developed countries. and developing, especially after June 2020. “The main reason for these upward trends in long-term interest rates was the strong demand for public debt needed to execute the fiscal stimulus packages taken to recoup production losses linked to Covid-19, “explained the annual MPS, released by Bangladesh Bank last time. the week.
In Bangladesh, 5-year, 10-year, 15-year and 20-year treasury bill yields were above 8.0% at the end of June 2020. Yields, however, fell below 7.0% at the end of June 2020. June 2021 Statistics from the central bank showed that the yield on 5-year treasury bills fell below 4.5%, while the yield on 10-year treasury bills stood at around 5.50% at year-end 21. The drop in yield reduces the rate of return for investors. At the same time, it eases some pressure on the government’s interest payment obligations.
A global virtual platform dedicated to analyzing government bonds across the globe predicts that the yield on all Bangladesh government treasury bonds will decline further by the end of December this year. The underlying assumption is that there will be less demand, so investment in government securities may fall.
An increase in secondary transactions coupled with a fall in yields on treasury bills seems to be a headache. If secondary market transactions increase, it may be due to increasing demand for bonds. Again, if the demand for Treasuries increases, this should be reflected in the increase in yields. The common thing seems to be absent in Bangladesh, which means that the market mechanism is not fully functioning here. The MPS sheds some light on the matter.
The MPS reported that the excess reserves of banks maintained for statutory purposes amounted to Tk 2,315 billion at the end of June 2021, to Tk 1,396 billion at the end of June 2020. About 65% of these liquid asset reserves Surpluses are kept by banks in the form of government securities and can therefore be easily converted into cash on the interbank market or on the secondary market. The press release acknowledges, however, that “the secondary market for government securities has not yet been developed”. Thus, the absence of an effective secondary market discourages longer-term investment in bonds. Instead, secondary trades are mostly focused on short-term liquidity management.
Sluggish economic activities due to Covid-19 are pushing banks and financial institutions to invest and trade guaranteed government debt instruments. In this process, banks and financial institutions tried to make up some of the lost income. In 2003, the Bangladesh Bank introduced the Primary Dealer (PD) system in the country’s financial market to improve the efficiency of the government securities market. BB has appointed a group of banks to deal exclusively with treasury bills and bonds. Currently, PDs play a vital role in the primary market and provide essential liquidity in the secondary market as market makers. Non-PD banks and financial institutions, as well as individuals, can also participate in the market to invest in government securities and conduct secondary market transactions.
However, a secondary operation in the bond market remains limited because government securities completely dominate the market. There is no secondary transaction in corporate bonds, and these are mainly traded between selected institutional investors or banks and financial institutions. Thus, borrowers can raise the necessary funds, but the return on investment is limited to limited market players.
The annual MPS also ignored adequate diversification in the bond market. There is no mention or review of the latest trend in the bond market, including the primary issuance of Treasuries and bonds, secondary trading of these instruments and yields.
When a monetary policy statement does not mention anything about the bond market or the country’s yields, it reflects the structural weakness of the country’s financial market. It also indicates that the central bank does not have much to do to contain inflation through the money supply. Instead of providing clear statements about the state of the bond market, MPS needs to go into detail and examine the relationship between yields and inflation. The central bank cannot conduct an effective monetary policy by neglecting the development and diversification of the bond market.