It is not retail investors' lack of appetite, rather brokerage firms' lack of interest that has kept bond trading limited to institutional investors and high net-worth individuals.
Brokers do not feel encouraged enough to cater to the demand of small investors for bonds.
In case of Treasury bonds, they can charge their clients at 0.10 per cent of the transacted volume per transaction. Hence, the higher is the trade volume the higher the transaction charge/fee is paid to the stock broker.
For trading of corporate bonds, transaction fee is fixed at Tk 100 each trade. But when a buyer places an order for a high volume, the purchase is usually done by multiple transactions. Therefore, the broker feels compensated to some extent for the job done.
Md. Ashequr Rahman, managing director of Midway Securities, said brokerage firms would have to be incentivised enough for trading of fixed-income securities.
While the commission that the intermediaries get is low, they worry that the funds injected in bonds remain stuck until the maturity of the investment instrument, said a senior official of LankaBangla Securities.
Bond holders may not trade the assets in the secondary market, which will shrink earning opportunity of stock brokers.
Moreover, stock brokers will not be able to advise investors to reinvest the interest income or the principal amount of bonds upon maturity as the money goes straight to the clients' bank accounts.
This is the backdrop to stock brokers' complete disregard for the opportunity given by the Bangladesh Securities and Exchange Commission (BSEC) to participate in auctions of T-bonds conducted by the Bangladesh Bank. The scope was created one and a half months back so retail investors can buy T-bonds via stock brokers.
Meanwhile, brokerage firms that are mostly engaged in trading of T-bonds are City Brokerage, LankaBangla Securities, UCB Stock Brokerage, IDLC Securities, Dhaka Bank Securities, United Securities, and Mercantile Bank Securities.
Of them, LanaBangla Securities and UCB Stock Brokerage have had major stakes in T-bond transactions.
What they do is collect T-bonds from primary dealer banks on receiving demand from high net worth individuals and corporate entities and then sell them.
In that case, transactions are executed between brokers and clients.
Such trades do not help the bond market flourish.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said transactions between brokers and their clients were one kind of block trade.
He said the higher interest rate of savings certificates was one of the obstacles to the development of the bond market.
However, investment in savings certificates has a limit. Investors, who would be willing to buy bonds beyond the investment limit in savings certificates, would hardly be able to get access to the instruments given the present situation.
The official of LankaBangla, who spoke on condition of anonymity, said that the broker helped small investors buy T-bonds only when a group of investors collectively place an order.
According to the Dhaka Stock Exchange, T-bonds have traded only in 42 sessions since the introduction of the instrument in the secondary market on August 10 last year.
The highest transactions on a single day were worth Tk 32.18 million, executed on April 16 this year. LankaBangla facilitated the transactions by managing bonds from PD banks to serve big investors.
Trading of corporate bonds is low too.
Only two transactions of corporate bonds worth Tk 0.001 million were recorded on Wednesday on the DSE.
The bourse saw transactions of corporate bonds of Tk 0.194 million on August 14, Tk 0.003 million on August 13, Tk 0.003 on August 10 and Tk 0.101 million on August 9.
No incentive for participation in auctions
The recent guidelines given for brokerage firms' participation in BB auctions have failed to generate any traction of T-bonds.
Apart from the reasons mentioned above, there are two other factors responsible for this.
Trading of equity-based securities is easily done on receipt of investors' funds from the consolidated customer's account (CCA). But to buy T-bonds, an investor will have to fulfill a form and then the stock broker will collect fund through a separate bank account.
Then the dealer bank will have to be informed of the demand and the units of the T-bonds will be transferred on completion of the auction.
The second issue is that the transfer of T-bonds through the central bank's MI module is faster than the system introduced for the capital market.
Investors, who purchase T-bonds from the central bank, get the units purchased within 15 minutes of auctions.
On the other hand, it will take three days for a stock broker to transfer its clients' units to their accounts.
The managing director of Midway Securities, Mr. Rahman said the timeframe should be the same in both the systems of the central bank and the capital market.
The transaction fee charged against a transaction of T-bonds is insignificant despite the fact that a stock broker has to complete a lengthy procedure to execute an order, he added.
Institutions are reaping the benefits
The BSEC has been striving to reduce portfolio risks of general investors through the introduction of fixed-income securities.
While investors' demand for the instruments is low mostly for their inadequate financial literacy, stock brokers have also not been playing their role to communicate the benefits of the debt instruments.
Amid the persistent dire state of the equity market, some banks have overcome the loss from investments in stocks by diverting funds into fixed- income securities.
For example, Shahjalal Islami Bank's investment returns from stocks plunged more than 22 per cent in 2022. At the same time, the lender's earnings from corporate and government bonds jumped 122 per cent to Tk 1.31 billion in 2022.
United Commercial Bank, Union Bank, City Bank and Prime Bank also increased their investments in fixed-income securities and realised expected returns in 2022.
Asset Management Companies (AMCs) are the other major investors of debt instruments.
Portfolios of some mutual funds show as much as 18 per cent of the total investments in fixed-income securities.
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