Rising demand for government securities

Asjadul Kibria   | Saturday, 22 January 2022

Last year witnessed another surge in the secondary transaction of the government's securities, fixed-income tradable securities to be exact. The rise indicates that the demand for government securities is growing in the financial market of Bangladesh. Total value of secondary transaction of these securities in total increased to Tk 1.83 trillion in 2021 which was Tk1.13 trillion in 2020, according to the central bank estimation. The amount was only Tk 0.46 trillion in 2019.

There are two types of fixed-income tradable securities: treasury bill which is short-term and treasury bond which is long-term. Currently, treasury bills having maturity period of 91-day, 182-day and 364-day are available in the market. There are also treasury bonds of 2-year, 5-year, 10-year, 15-year and 20-year. Fixed-income non-tradable securities or various savings certificates are not possible to trade in the secondary market. These instruments are widely used by the government to borrow directly from the public to finance the budget deficit besides the treasury bills and bonds. 

Generally, tradable government securities are issued through auctions. Auction calendar is published by Bangladesh Bank with the approval of Ministry of Finance. Auction notice is provided as per auction calendar although sometime the central bank suspends or defer the auction.

Growing demand for the treasury bills and bonds in the secondary market may be looked at from different points of view. Considered as the safest form of investment, as they are backed by the government, risk-averse investors are generally keen to purchase these securities. The risk of default is almost nil here and return against the investment is guaranteed, although the rates of return are lower compare to corporate bonds and other financial products in the market.  However, treasury bills and bonds are not entirely risk-free in the sense that they are also subject to fluctuations in interest rates.

Though both the individual and institutional investors are allowed to invest in these tradable fixed income securities, the number of individual investors is quite small. Institutional investors include commercial banks, non-bank financial institutions (NBFIs), insurance companies, corporations, authorities responsible for the management of provident funds and pension funds. They are eligible to purchase the treasury bills and bonds from the primary market. Individual investors, however, needs to purchase the bills or bonds through a bank or an NBFI. For trading in the secondary market, they also have to go through the primary dealers (PD). Bangladesh Bank statistics show that less than one per cent of the total annual investment in treasury bills and bonds is from individuals. In the fiscal year 2019-20 (FY20), around 0.30 per cent of the total holding of the government securities was owned by the individual investors. Thus, value of investment made by the individuals stood at Tk7.57 billion at the end of June, 2020. Banks were the largest investor-class accounting for 73.79 per cent of the overall holding of the government securities during the period under review. Updated data for the last year is still not available.

As the tradable government securities are non-cashable before the maturity, it is the secondary trading that facilitates the investors to redeem the bonds when necessary. This may be another reason behind the rise in secondary transaction of these securities.  Moreover, there is no ceiling for investing in the treasury bonds.  It is to encourage individuals and corporate entities to park their money in these securities. With lower interest rates in bank deposits along with some risk factors, cautious investors are slowly switching to treasury bonds. Gap between bank deposit rate and yield of the government securities have also been narrowed down significantly.  Weighted average interest rate of the banks was estimated at 4.0 per cent in December last while yield of 364-day treasury bill was 3.44 per cent.  This indicates that the financial market is growing with further maturity. 

Nevertheless, distortion in the market is still there mainly due to non-competitive higher rate of return on the non-tradable government securities. For instance, when average yield of 5-year treasury bond was 6.41 per cent at the end of the past year, 5-year Bangladesh Sanchaypatra (savings certificates) offers9.20 per cent profit in the first year of its maturity. The big gap discourages individuals to invest in the in the government tradable securities. For the government, interest burden is high in terms of savings certificates.

To reduce the sale pressure of these certificates, the government in September last cut the bank's commissions to 0.05 per cent from 0.50 per cent on sales of the savings certificates. The outcome of the small step helped to reduce the sales of the instruments. Net sale of the certificates dropped by 72 per cent in October last from the previous month of September. In November, it declined by further by 9.10 per cent from October last.   Instead of this kind of tinkering, the government actually needs to cut the profit rates of the savings certificates further or make the rates market-oriented. This will help to remove the existing distortion in the rate setting gradually. This is an old suggestion. Economists, market experts and development partners have long-been suggesting to do so.

Lower rate of returns on treasury bonds against the excessive higher profit rates of savings certificates along with complex market structure discourage the individuals to invest in the government securities. Again, some 221 treasury bonds are listed with the Dhaka Stock Exchange (DSE). These were all non-tradable for long. Several steps have, however, been taken to activate the trading of these bonds in the bourse. Thus, a lot of work is needed to make the financial market more mature in the longrun.

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