Secondary bond market still elusive

Bangladesh is far off from getting a much-needed secondary bond market as 96 percent of the securities issued by the government are owned by banks and insurers, which are tightly holding on to them to meet their regulatory requirements.

As of June, the government issued treasury bills and bonds worth Tk 162,768 crore, according to data from the Bangladesh Bank.

Banks have 77.12 percent or Tk 124,759 crore of them with a view to maintaining the statutory liquidity ratio determined by the Bank Companies Act 1991.

Similarly, life and general insurance companies possess treasury bills and bonds worth Tk 12,800 crore to fulfil their legal compliance. The central bank also owns 10.81 percent of the securities. 

This leaves only 4 percent of the total securities issued by the government for individuals, provident and gratuity funds of the government and non-government agencies, foreign investors, arrangers of mutual funds, corporate and investment bodies.

A bond is a debt instrument issued for a specific period of time for the purpose of raising long-term capital.

Governments, companies and other organisations issue bonds to raise money; in doing so, they have an obligation to repay the bondholder according to specific terms.

In most cases, a bond is redeemable at face value on a particular date and has a fixed rate of interest that is paid at regular intervals through to maturity.

“The demand for bonds has recently shot up,” said a BB official, adding that there are no sellers in the secondary market.

Some banks are holding on to their excess bonds after fulfilling their regulatory requirements as there is now little scope to purchase fresh securities from the primary market, he added. “The low supply of bonds is not favourable for developing a bond market,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

And in the absence of a vibrant secondary bond market, bonds have become non-tradable assets, he said, adding that no effective measure has been taken to date to address the situation.

Had there been a functional bond market, the government could have easily mobilised funds to implement mega infrastructural projects, according to Mansur, a former economist of the International Monetary Fund.

At present, companies are heavily reliant on banks for their requisite financing; there is virtually no way for them to raise funds by issuing bonds.

If the government securities are not traded in the secondary market, corporate bonds will never come through, he said.

The yield of corporate bond has a direct link with the interest rate on the government bonds. The corporate bodies fix the yield of their bond considering the rate of the government securities, he added.

The high interest rate on national savings certificates is one of the reasons behind the poor bond market, said AB Mirza Azizul Islam, a former caretaker government adviser.

The interest rate on the savings certificates ranges from 11.04 percent to 11.76 percent, whereas the yield from treasury bonds is between 4.50 percent and 7.97 percent.

“The government manages its deficit financing by issuing costlier national savings certificates, bypassing the treasury bills and bonds,” Mansur added.