Trade in secondary bond market hits an all-time high
The secondary bond market in Bangladesh has boomed in recent months on the back of lower interest rates on bank deposits and a set of measures taken by the central bank.
Trading in the secondary bond market hit an all-time high in December as transaction rose 157 per cent year-on-year to Tk 29,188 crore, data from the central bank showed.
Since July, the trading of government securities has received a shot in the arm as investors are getting lower interest on deposits kept at banks than the Treasury bonds (T-bonds).
Banks now face excess liquidity in the wake of lower credit demand from both the private sector and the government, forcing them to cut the interest rates on the fixed deposit receipts.
Excess liquidity in the banking sector surged 95 per cent year-on-year to Tk 204,700 crore in December.
Besides, the measures, including selecting benchmark Treasury bonds by the central bank, have made the secondary market vibrant. The benchmark bonds help lenders fix the interest rate of securities.
What is the secondary bond market?
T-bonds are the securities issued by the government that have maturities spanning from two years to 20 years. Bondholders earn interest semiannually until maturity.
The government issues the securities to mobilise funds to manage its deficit financing. The bonds are sold through auctions every month at the central bank headquarters, and banks are the main clients.
But, the secondary bond market is the marketplace where investors can buy and sell bonds.
The proceeds from the sale of bonds in the secondary market go to the counterparty, which could be an investor or a dealer. In contrast, in the primary market, money from investors goes directly to the issuer.
Why is the secondary bond market booming?
In November last year, the central bank selected 30 types of securities as the benchmark bonds to allow lenders to set the interest rate of the 269 bonds that have been issued by the government and are now available in the market.
The central bank also asked the primary dealer banks to declare the two-way price quote (selling and buying) for all bonds. The PD banks have to announce the prices at the central bank's market infrastructure module, which is linked with a virtual trading platform, Government Securities Order Matching (GSOM).
Individuals and corporate entities can monitor the price trend through the GSOM before buying and selling securities.
The excess liquidity in the banking sector is another reason for the higher trading in the secondary market.
Arif Khan, managing director of IDLC Finance, said many banks and non-bank financial institutions were now embracing the secondary market to invest surplus funds.
The lower demand for loans has encouraged lenders to invest in the secondary market. Lenders have turned to the window to make a profit in the wake of business slowdown deriving from the coronavirus pandemic, he said.
Corporate entities now prefer government securities as the interest rate on the FDRs has nosedived due to the lower credit demand. They also see the bond market as the safest investment destination as the financial health of many banks has deteriorated because of the business slowdown.
Banks with higher credit rating offer a maximum of 3-4 per cent interest rate on FDRs, whereas investors now earn 3 to 6 per cent in interest from the T-bonds, whose maturity ranges from two to 10 years.
Besides, the government has recently capped the investment in savings certificates, which provide interest ranging from 11.04 per cent to 11.76 per cent.
A person cannot invest more than Tk 50 lakh in the savings instruments. Under joint names, the investment limit is Tk 1 crore, a cap that discourages wealthy people from putting in too much money in the high-interest-bearing savings instruments.
There is no such investment ceiling in the T-bonds, encouraging individuals and corporate entities to pour money in the tools.
The ongoing vibrancy in the secondary market may not sustain when the economy makes a turnaround from the slowdown, Khan said.
Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, said it was very encouraging that trading in the secondary bond market had got momentum, which would give a breathing space to the government to manage its budget.
PD banks have to purchase T-bills and bonds. So, they usually face liquidity shortage when borrowing by the private sector and the government goes up, Ahmed said.
But a vibrant secondary bond market will resolve the problem as the investors of the secondary market supply the required fund to the government.
In recent months, the interest rate on government securities has declined due to increased trading in the secondary market, Ahmed said.
"This has helped the government to cut its cost to mobilise funds."
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