Secondary trading of Treasury bonds on the Dhaka Stock Exchange (DSE) remains subdued despite the rapid expansion of the bond market as a parallel interbank trading platform continues to keep institutional investors away from the bourse.
T-bond trading on the prime bourse slid 38 per cent year-on-year to Tk 576 million in the first six months through June this year, accounting for less than one per cent of the exchange's total turnover, indicating that the market remains far below its potential.
The lacklustre performance contrasts sharply with Bangladesh Bank's secondary market, with an outstanding balance of Treasury bonds worth nearly Tk 6 trillion; most of the secondary transactions continue to be executed through the central bank's electronic platform instead of the stock exchange.
Banks, which hold more than 85 per cent of outstanding Treasury bonds, prefer trading directly with one another through the central bank's platform, where transactions involve no brokerage commission and offer greater pricing flexibility and liquidity.
Treasury bonds trading through the DSE requires payment of Tk 100 per transaction as commission along with other transaction fees, making exchange-based trading less attractive for institutional investors that handle large volumes of transactions.
Salim Afzal Shawon, head of research at BRAC EPL Stock Brokerage, said the secondary market of the stock exchange is capable of executing a much higher volume of trades than what was recorded, but structural problems have remained unaddressed.
He explained that since the interbank trading of treasury bonds under the infrastructure of the central bank is still operational and this involves no cost, banks prefer to trade using the central bank platform instead of the stock exchange.
"Since banks can trade bonds directly among themselves without involving brokers, they have little incentive to use the DSE platform."
Mr Shawon also cited cumbersome settlement procedures and custody arrangements, which remain largely linked with the central bank, making transactions through the exchange comparatively less convenient.
Many brokerage firms are also not interested in trading bonds, because trading equities brings higher commission payment.
Another major weakness in the secondary market bond trading through brokers is the absence of dedicated market makers. Unlike mature bond markets, where dealers continuously provide buy and sell quotations, many Treasury bonds listed on the DSE lack sufficient bids and offers, discouraging investors from trading.
The primary function of a market maker is to ensure liquidity. Bond markets, particularly government securities, often have fewer active buyers and sellers than equity markets. Market makers bridge this gap by buying bonds when investors want to sell and selling bonds when investors want to buy.
Consider an institutional investor who wants to sell Tk 500 million worth of Treasury bonds. If no buyer is immediately available, the market maker purchases the bonds from the investor and later sells them to another investor.
Meanwhile, retail participation has also remained limited as many individual investors are still unfamiliar with bond pricing, yield rates, accrued interest and duration.
"Most retail investors continue to favour equities, fixed deposits and national savings certificates over government securities," Mr Shawon added.
Treasury bonds are coupon-bearing investment instruments with maturities ranging from two to 20 years. Secondary trading of these securities began on the DSE in October 2022 to diversify investment options beyond equities and mutual funds. Currently, 220 Treasury bonds are listed on the exchange, with nearly half of them trading above their Tk 100 face value.
Akramul Alam, head of research at Royal Capital, said the strong performance of the equity market this year has also dampened investor interest in Treasury bonds.
"The equity market delivered more than an 18 per cent return in the first half of the year, making Treasury bonds relatively less attractive for stock market investors," according to Mr Alam.
He noted that the interest-rate environment has also shaped trading activity. Rising yields encourage investors to hold bonds until maturity to avoid capital losses, while falling yields lift bond prices and stimulate secondary market trading.
Although the yield of T-bonds is showing a declining trend in the past two months, overall yields are still high.
Market participants, however, are optimistic that the secondary trading of Treasury bonds on the DSE will gain momentum in the coming years, supported by policy changes, declining yields and growing investor awareness.
The central bank's recent introduction of the pro-rata allocation system in primary T-bond auctions is expected to stimulate activity in the secondary market.
A Bangladesh Bank official, requesting anonymity, said one of the objectives behind introducing the pro-rata allocation method was to encourage the development of an active secondary market for government securities.
Under the new mechanism, investors who submit bids in primary auctions receive only a proportion of the amount they have applied for when demand exceeds the government's targeted borrowing.
For example, an investor bidding Tk 1 billion may be allotted only Tk 500 million worth of bonds on a pro-rata basis. The remaining investment requirement would have to be met by purchasing bonds in the secondary market.
"The pro-rata allocation system will naturally encourage investors to turn to the secondary market to complete their desired investments, which should gradually improve liquidity on the stock exchanges too," said Mr Shawon.
Appointing dedicated market makers, simplifying settlement procedures, integrating the DSE's trading infrastructure with Bangladesh Bank's debt management platform, and encouraging banks and institutional investors to execute more trades through the stock exchange are crucial for a vibrant bond market on the stock exchange.
Meaningful growth of T-bond trading will require coordinated structural reforms involving Bangladesh Bank, the Bangladesh Securities and Exchange Commission (BSEC), the Dhaka Stock Exchange and primary dealer banks.
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