Stocks to remain gloomy even after fall in T-bond rates

The declining trend in the yields of Treasury bonds is unlikely to make a positive impact on the equity market as investors will be driven to safer schemes for better return.
The interim government has started reducing the interest rates of government bonds in September because of its lower appetite for domestic borrowings. That is expected to shift banks' focus from T-bonds to borrowers from the private sector.
Insiders say Treasury bond rates will continue to fall for a significant period of time and the banks, which are major investors of such debt securities, will be bound to expand their lending portfolios supporting the growth of the private sector.
Since only an insignificant number of listed companies are good performers, the overall private sector's growth will not be reflected in the stock market.
Meanwhile, the central bank raised the policy rate by 50 basis points to 9.50 per cent in the last week of September. It also said the rate would go up again along with the lending rate by the end of this month, aimed at taming the double-digit inflation.
The objective of simultaneously boosting the policy rate and lowering the yield of T-bonds is to help the private sector grow while bringing down inflation.
The rise in the policy rate will push up lending rates.
Lending rates have already climbed up to 14 per cent since the withdrawal of the cap.
To attract depositors, banks will offer higher deposit rates. Only a handful of lenders, which already receive a bigger chunk of the deposits because of their credibility, will remain conservative about giving higher interest rates.
Hence, if the policy rate is increased further, lending and deposit rates will move up further.
"Individual savers will prefer deposit schemes to stocks as the existing deposit rates are much higher than the return of the market," said Md. Ashequr Raman, managing director of Midway Securities.
Presently, many banks are offering interest rates above 10 per cent against deposits while the broad index of the Dhaka bourse experienced a negative growth of 15 per cent in the last one year.
After the change of the political regime on August 5, the market experienced a significant liquidity flow for a short while. Then the market dipped again and the volatility persisted.
Investors' participation plummeted significantly. The Dhaka Stock Exchange (DSE) witnessed daily turnovers going below Tk 3 billion on recent sessions including that of Wednesday.
Meanwhile, the government on Tuesday decided to transfer interests against savings certificates (Sanchayapatra) to investors' bank accounts on a monthly basis. A meeting held between the finance ministry and the revenue board also decided that interest rates of public savings instruments will be raised.
These changes will lure investors to savings instruments and deposit schemes.
Despite the unfavourable climate, there are market operators who feel optimistic about the outcome of the reduced yields of Treasury bonds for the stock market.
Chairman of EDGE Asset Management Asif Khan said it would be good for the market in the long run if the return from government debt securities kept falling gradually.
On the other hand, the chief of Midway Securities, Mr. Rahman said T-bonds would remain lucrative to banks unless their yields fell significantly.
Fallout of high-yielding T-bonds
The previous government had a plan to borrow Tk 1.37 trillion in FY24 from banking sources.
As part of the inflation controlling measures, the interim government considers curtailing domestic borrowing significantly. Moreover, the government usually needs less funds to implement ADP (annual development programmes) in the first two quarters of a fiscal year.
When banks see T-bonds offering less in return on investment, they will lend more to productive sectors and slow down their investment in T-bonds.
That is necessary because banks have been concentrating on public debt securities for higher interest rates.
To amplify profits, the financial institutions even borrowed funds at a lower rate from the Bangladesh Bank, which is permissible against their purchased government securities, and then injected the same fund into government securities to avail of higher rates.

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