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The government, for the first time, has decided to issue new investment bonds having a floating rate.
The objective behind introducing the bonds is to meet the government's own rising financial need and develop debt profile, officials said.
Primary dealers (PDs) think that shorter floating rate securities will help ensure government's borrowing plan.
But experts are not convinced about the issuance of the proposed floating rate bonds. They think that financial management of the government will face difficulties if such bonds are introduced.
When asked, former Bangladesh Bank governor Dr Salehuddin Ahmed said it will not be practical to issue any floating bond in the country as debt management capacity of the government is not good right at this moment.
The government should emphasise the need for improving the existing secondary market, adding that with floating rate bond, the fiscal management on its part will be difficult. He, however, said investors will be more interested in the floating rate, he said.
When contacted, additional secretary of the finance division Md Ekhlasur Rahman said the government has already issued a notification in this regard.
The officials said maturity period of the bond styled "Floating Rate Treasury Bonds" (FRTB) will be more than one year.
Benchmark/reference rate would be weighted average yield of the three-month treasury bills (TBs) as determined in the previous three-month auction held prior to the FRTB's auction. Along with, a spread will be fixed on the auction day. It will be added with the benchmark and fixed with the lifetime of the floating bonds, a high official involved with the procedure said.
The government borrows from scheduled banks through government T-bills and T-bonds and the non-banking system mainly through National Savings Directorate (NSD) for meeting its deficit financing, a senior official of the finance division told the FE.
He said shorter-maturity floating rate bond tends to have lower risks from the fluctuating interest rates.
The FRTB has lower risk of changing interest rates and it minimises government cost because the coupon is reset every three months. It will help curtail debt cost largely, he mentioned.
At present, 2/5/10/15 and 20 years maturity Bangladesh Government Treasury Bonds (BGTBs) are available for investment. Coupon rates are determined by the auction committee and coupons are payable semi-annually from the date of issue. Coupons are fixed throughout the lifetime of the BGTBs. For this, the government has to provide more cost for this purpose.
The government's debt purpose cost will be lowered and balanced more than existing bonds.
The government has decided to introduce an additional instrument aiming to keep the government budget deficit financing risk-free, diversify and develop further the bond market, he said.
According to the feature of the floating bond, "The FRTB will be issued at par and the coupon will be paid on the par amount. The coupon rate will be expressed as a summation of Bangladesh Compounded Rate (BCR) which is a daily rate announced by the Bangladesh Bank (BB) and spread which is determined through auction, for calculating coupon on auction the BCR of the auction date will be applicable."
The coupon rate determined in auction will be fixed for the first quarter and reset on every coupon payment day for the next quarter according to the BCR of that day. If the coupon payment dates fall in a holiday the BCR of the consecutive business day will be applicable for re-fixing coupon rate, the features mentioned.
Individuals and institutional investors, both resident and non-resident, will be eligible for purchasing and holding the FRTBs.
Besides, non-resident investors will be eligible to purchase the floating bond with fund from a non-resident foreign currency account, or Non-resident Investors Taka Account (NITA) with a bank in Bangladesh in the name of the purchaser. They will also be eligible to transfer coupon payments and resale or redemption proceeds abroad in foreign exchange, according to the features.
An official said the bids shall be for face value amounts in multiples of Tk 0.1 million. The FRTBs will be traded freely in over the counter (OTC) or in the order matching system.
The BB will formulate the manual of the floating bond including the detail auction and settlement procedure with prior approval of the government.
The proposed floating rate bonds will help the government ensure smooth borrowing, bond dealers told the FE.
Besides, there is a huge space for individuals to buy the floating bonds, they also mentioned.
But the banking industry's profits may fall if the bonds are issued, they also said.