Trading in Treasury bonds on the Dhaka Stock Exchange (DSE) surged 55 per cent year-on-year to Tk 1.31 billion last year mainly due to higher interest rates and an easing of the transaction process through brokerage firms.
The trade volume is still insignificant compared to the potential of the market, the size of which has surpassed Tk 3 trillion.
The secondary market of public debt securities, which was launched about two years ago, has witnessed a rapid growth at a time when the equity market has remained sluggish for a gloomy economic outlook.
The benchmark index of the Dhaka bourse plunged 1,030 points or 16.5 per cent in 2024, the biggest annual decline in four years, amid economic uncertainties coupled with a notable shift in the country's political environment.
Meanwhile, the Bangladesh Bank has kept pushing policy rates up to tame inflation. Eventually, that led to an increase in interest rates offered against T-bonds.
The interest rate of 20-year T-bonds jumped to a 15-year high of 12.75 per cent in October last year. It then slid to 12.68 per cent in December.
With the easy access to T-bonds and quick transactions through brokers, high net-worth individuals alongside institutional investors, such as provident funds, insurance companies, and mutual funds, took positions in the debt securities to divert investments from the bearish stock market.
T-bonds offered a better return than bank deposits and FDRs (fixed deposit receipts).
For example, BRAC Bank offered a 9-10.5 percent interest rate against FDRs in October last year when T-bonds auctioned had rates ranging from 12.2 per cent to 12.79 per cent.
Many other banks offered higher rates, but with the prevalent poor image of the banking sector investors considered T-bonds safer than saving schemes of banks.
It is also easy to liquidate T-bonds in the secondary market and there are tax benefits too.
Since the yield is rising, T-bonds are mostly sold at a discount. On Wednesday, the highest discount at which 10-year government debt securities were sold was 28 per cent, with maturity in 2028.
However, some 15-year T-bonds traded above the face value -- at prices up to Tk 102.74 per unit, which will also be matured in 2028.
Apart from high returns, 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 3 million for an individual and Tk 6 million for a couple.
Easy transactions of T-bond through stock exchanges made the investment vehicle popular, said Mohammad Emran Hasan, managing director of Investit Asset Management. Trading in T-bonds through the Bangladesh Bank platform is a bit complicated and general investors do not have access to it, he added.
Treasury bonds were introduced on the prime bourse in October 2022, opening up an opportunity for retail investors to diversify their portfolios. Until then, the market comprised only equity-based securities and mutual funds.
Although initially investors struggled to trade through brokerage firms, many firms in the past several months have adopted means to facilitate trading in T-bonds due to the rising demand of clients.
At present, there are 234 Treasury bonds listed on the prime bourse with tenures ranging from 2 years to 20 years, according to the data of the DSE.
Akramul Alam, head of research at Royal Capital, told The FE that the government securities have double-digit yield rates with no visible opportunity cost of investment.
The T-bond market will grow further, as the government has to borrow billions of taka to mitigate its budget deficit, he said. "Our tax collections are poor, so no option for the government other than T-bonds and T-bills to meet the deficit."
Barrier to expected growth
Despite a favourable climate for the secondary bond market to flourish, its growth is slower than expected.
The market is capable of facilitating a higher volume of trades than recorded; the main obstacle is higher costs.
On an average, the country sees trading in T-bills and T-bonds worth more than Tk 5 billion a day, whereas the Dhaka bourse accounted for only Tk 1.31 billion in a year, said Md. Moniruzzaman, managing director of Prime Bank Securities.
"That was insignificant."
Major investors of Treasury bonds are banks, but they are reluctant to trade through the stock exchanges because of higher transaction costs, said Mr Moniruzzaman.
At present, the commission on the sale of T-bonds is 0.1 per cent while there is no cost involved when banks trade in securities and bonds between each other via the central bank's secondary market.
A parallel secondary market for Treasury bonds exists in the Bangladesh Bank and it has been there for long, which is another reason for lower-than-expected transactions through stock exchanges.
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