Buyers, sellers flock to secondary T-bond market as interest rate rises

FARHAN FARDAUS | Published: January 15, 2024 00:39:29

Trading in Treasury bonds has gained momentum in the capital market as higher rates of return from fixed assets have given rise to new demand and supply.
The monthly turnover of such investment vehicles on the Dhaka Stock Exchange surged by 260 times to Tk 373.41 million between October 2022 and October 2023.
Though experts say the trading volume is still insignificant compared to the market's potential, it shows how a new market for Treasury bonds has been emerging.
The rising interest rate is what is driving both sides of buyers and sellers to the secondary market.
"The main reason behind the increase in T-bond trades is the interest rate," said Mohammed Rahmat Pasha, managing director and chief executive officer of UCB Stock Brokerage Limited.
As the Bangladesh Bank has kept pushing interest rates up to tame inflation, banks, which usually purchase government debt securities by participating in BB auctions, looked to encash bond holdings to invest in new bonds offering a higher yield. In the year to October last year, the interest rate of five-year Treasury bonds rose from 7.72 per cent to 10.1 per cent.
The secondary bond market that was launched on October 9, 2022 opened up the opportunity for banks to liquidate assets quickly to buy new instruments for higher interest gains.
On the other hand, investors, mainly provident funds, insurance companies, and mutual funds, were searching for a way to divert investments from the stagnant stock market and fixed-deposit receipts (FDRs) to risk-free, high return T-bonds.
The easy way to do so was to buy bonds from the secondary market than from BB auctions.
Investors like provident funds took positions in T-bonds, as they deemed those a better alternative to bank deposits or FDRs. Banks provided a much lower interest rate against deposits than T-bonds.
For example, BRAC Bank offered a 7 per cent interest rate against FDRs in October 2022 when return from T-bonds was 7.70 per cent. The interest gap has widened over time. The FDR rate of BRAC Bank at present is 8.5 per cent whereas the return from T-bonds has increased to 10.1 per cent.
Moreover, many banks in the country are in trouble with poor-quality assets, raising fears of default on interest payments. Hence, Treasury bonds are now considered safer than bank savings.
T-bonds offer better liquidity and tax benefits as well.
Government-imposed restrictions on investment in savings certificates also fueled the demand for T-bonds.
Savings certificates are a better alternative to FDRs, but the government allows provident funds to invest only in one type of savings certificates -- five-year Bangladesh Sanchayapatra - for a return of 11.28 per cent at present.
Savings certificates are tied to an investment ceiling of Tk 30 lakh for an individual and Tk 60 lakh if two individuals buy the instruments together.
Obstacle to growth
Despite a favourable climate for the secondary bond market to flourish, its growth is slower than expected.
MD Saifuddin, managing director of IDLC Securities, told the FE that the secondary market was capable of facilitating a higher volume of trades than what was recorded; a lack of incentives for brokers was a major roadblock.
The intermediaries can charge clients at a rate of 0.10 per cent of the transacted volume per transaction. The higher is the trade volume the higher is the transaction charge/fee paid to the stock broker.
The data of the central bank shows that the secondary trading of T-bills and T-bonds amounted to Tk 1388.65 billion (or around Tk 1.39 trillion) in the first eleven months of 2023, which was Tk 1036.54 billion (or Tk 1.13 trillion) in the same period of the previous year.
Most of the secondary trades in 2023 took place between banks and other institutions.