The bond market worldwide has been growing, though not at a similar or steady pace and only in some economies. The United States (US) alone covered 39 per cent of the world bond market, followed by China having a 16 per cent share in 2022. The overall size of the global bond market totalled $133 trillion in that year, which was only $37 trillion in 2001. An analytical note of the World Economic Forum (WEF) said that being one of the world's largest capital markets, bonds or debt securities have grown sevenfold over the last 40 years. The WEF note also mentioned that government and corporate debt sales across major economies and emerging markets have fuelled the growth. In other words, different government and private companies have issued bonds to meet their expenditures.
Bond is a fixed-income instrument that represents a loan made by an investor or a borrower (usually corporate or government). That's why the bond is also known as debt securities. A bond generally pays a fixed interest rate, also known as a coupon, to the investor or the securities-holder, and so it is labelled as a fixed-income instrument. Many corporate and government bonds are publicly traded. Others are traded privately between the borrower and lender, and it is known as over-the-counter trade.
A bond is also considered a safe investment in the financial market compared to equity or stock. The investors generally get a predictable and reliable income stream of fixed return. Though the return is lower than the return on stock investment, the investor knows what he or she will get after a certain time. Income from stock or share is mostly variable and unpredictable. It depends on the fluctuation of share prices in the capital market. As it is risky compared to bonds, the rate of return is higher, and there is an opportunity to make a windfall profit if the investor can utilise the market situation in time. Similarly, investors may face a significant loss due to a sudden price fall or a stock market crash. Thus a bond is more suitable for risk-averse investors.
In Bangladesh, the bond is yet to be a popular investment option, and the bond market is small and dull. Even with various measures taken by the authorities in the last couple of years to make the bond market vibrant, the outcome is minimal.
Currently, the bond market is dominated by government bonds. There are two types of government bonds or fixed-income securities. One is tradable; another is non-tradable. Treasury bills and bonds are tradable securities, while savings certificates are non-tradable. These three securities account for over 95 per cent of the Bangladesh government's debt securities market. The government uses all these securities to borrow from the financial market to finance the budget deficit.
Individuals and institutions are allowed to invest in all these debt securities. Due to the higher rates of return, individuals prefer savings certificates, which are not tradable in the market. Individuals can also invest in treasury bills or short-term government securities and treasury bonds or medium- and long-term securities through banks. T-bills and T-bonds are tradable in the secondary market. 242 T-bonds are also listed on the stock exchanges at present.
However, secondary transactions of T-bills and T-bonds declined by 47.50 per cent in FY23. Bangladesh Bank statistics showed that the value of the secondary trading of these bills and bonds came down to Tk 1.09 trillion in the last fiscal year from Tk 2.08 trillion in FY22. Trading of these securities is also marginal in the stock exchange. After the start of secondary trading in the Dhaka Stock Exchange (DSE) in October last, the value of the transaction stood at around Tk 0.15 billion at the end of June this year.
In Bangladesh, the issuance of corporate bonds is also growing slowly. In the last three years, the average issuance of corporate bonds, debenture and sukuk stood at Tk 100 billion annually. Most of the instruments were issued under private placement, which means these are sold to a few chosen institutional investors. At the rising stage of a bond market, it is not unusual that private placement gets the maximum amount of the corporate bond. Even in India, where the financial market is big and mature, issuers of corporate bonds still prefer private placement. For instance, in FY22, corporate bonds worth INR 5.9 trillion were issued under the private placement, and only INR 0.1 trillion came to the market through public offering. Again, in India, bank credit is still the primary source of corporate financing. Total outstanding credit by banks stood at INR 68tn to industry and service sectors at the end of 2022, while the outstanding amount of corporate bonds was INR 41tn.
In Bangladesh, due to traditional bank dominance, the majority of the private financing needs are met by financial institutions. Businesses and corporates also prefer bank financing, and most want to avoid going to the capital market by issuing shares or bonds. Various problems in the country's banking sector, including a large volume of default loans, are also an outcome of the over-dependency on bank financing. Around 9 per cent of the total bank loans were non-performing at the end of March this year.
Different companies can mobilise their required funds by issuing corporate bonds, debentures, and commercial papers. Usually, debentures are unsecured debt instruments issued by companies to expand their business activities. It may or may not be backed by collateral and offers higher returns than bonds. Commercial paper is another unsecured debt instrument which is short-term in nature. Some companies in Bangladesh have already issued commercial papers to finance their various short-term liabilities.
Thus, all the elements and various instruments of the debt market are available in the country. A primary debt or bond market is also there, which is expanding slowly. The secondary market is, however, still far away.
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