a year ago

Making individuals' investments in T-bonds easy

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Last year was marked by a big drop in the secondary trading of fixed-income tradable government securities. The value of annual secondary trading in these securities stood at  Tk 1.13 trillion in 11 months of 2022. December figure is yet to be released by the central bank. The amount was Tk 1.83 trillion in 2021.  Even if there had been a big amount of trading in the final month of the last year, the annual amount would stay well below the previous year's.

In fact, the 11-month secondary trading of govt securities in the past year was equivalent to that of 2020.  In 2020, the annual value of the secondary trading in the fixed-income securities for the first time crossed Tk 1.0-trillion mark, recording a jump by 145 per cent over the previous year and also reflecting a growing demand for secure investment options. In 2021, the secondary trading in these securities increased by 61 per cent.

Though both institutions and individuals are allowed to invest in these instruments, mainly through primary dealers (PDs), participation of the latter is still small, less than 10 per cent of the total secondary trading.  And more than 90 per cent are institutional investors including banks, non-bank financial institutions, insurance companies, corporations, provident funds, pension funds and mutual funds.

Lack of clear knowledge and understanding of the trading patterns is one of the main barriers to the individuals investing in these securities. What is noteworthy here is that there are two types of fixed-income government securities that are tradable. One is short-term or treasury bills, another is medium- and long-term or treasury bonds. T-bills are government-issued zero-coupon debt instruments that are risk-free. There are 91-day, 182-day, and 364-day T-bills. These debt instruments are issued to address government's short-term funding needs. Treasury bonds carry periodic (half-yearly or quarterly) coupon payments with the redemption of the face value at maturity. Also known as 'vanilla bonds (meaning basic and safer bond)', there are 2, 5, 10, 15, and 20-year T-bonds available on the country's debt market.

Many individuals also face difficulties as to how to invest in the treasury bonds. Though many commercial banks, including the PDs, offer service for individuals to invest in these bonds, in reality only a limited number of banks' branches provide the service.

Individuals and institutions purchase these bills and bonds on the primary and secondary markets. These can also be traded on the secondary market via Trader Work Station (TWS) and over-the-counter (OTC) in the Market Infrastructure (MI) module by all manner of investors.  Generally, an individual or an institution needs to open a BP ID in the MI module through a bank or NBFI. Once the ID is opened, the investor can request the bank or NBFI to purchase desired securities by depositing funds. After procuring the securities from the auction or from the secondary market, it is kept against the BP ID. Moreover, it is the bank or NBFI's responsibility to collect coupon and sale proceeds.

Nevertheless, most of the banks or NBFIs find it burdensome to provide the service to individuals for obvious reasons. Unlike the savings certificates, the non-tradable fixed-income government securities, there is no commission for selling the treasury bonds. It also requires prior approval from the central bank to purchase T-bonds by individuals -- to open the BP ID which needs some extra paper work. Moreover, banks are used to selling the savings certificates for long and individuals are more interested to purchase these certificates for good returns.  Anyone with a bank account and tax-identification number (TIN) can purchase the savings certificates through the bank.  The savings certificates are also easy to encash when needed.

Like the savings certificates, treasury bonds are also risk-free. The yields, the expected earnings generated and realised over a particular period of time, vary in terms of maturity. At the end of November 2022, the yield on 2-year T-bond was 7.49 per cent. The rates were 7.81 per cent for 5-year T-bond, 8.25 per cent for 10-year T-bond, 8.67 per cent for 15-year T-bond and 8.72 per cent for 20-year T-bond. At the same time, 364-day T-bill yield stood at 6.93 per cent and for 182-day T-bill, the rate was 6.58.

It appears that medium-term debt securities offer more attractive returns. A comparison with the savings certificates may help to clear the picture. At present, the minimum profit rates for quarterly interest-bearing Sanchayapatra, 5-year Bangladesh Sanchayapatra, Poribar Sanchayapatra, and Pensioner Sanchayapatra are: 9.0 per cent, 9.50 per cent, 9.30 per cent and 9.75 per cent respectively on maturity. (The maximum profit rates are: 11.04 per cent, 11.28 per cent, 11.52 per cent, and 11.76 per cent respectively). Though these non-tradable securities offer higher return compared to T-bonds with similar maturities, the gap has been slowly narrowing over the last couple of months.

The profit rates for savings certificates are also not market-based and kept high artificially. This enhances the interest-repayment burden on the government. One way to attract more people to treasury bonds is reducing the profit rates of savings certificates or make those market-based. It will help investors diversify their portfolios. The tax benefit for investing in T-bond is also there, which needs to be highlighted properly.

As treasury bonds are already listed on the stock market, individuals now have the wider opportunity to invest in these debt securities. The secondary trading in these bonds on the bourse, which started last October, is still tiny. There are a number of potential buyers on the bourse whereas the number of sellers is quite small. Most of the T-bond holders are institutions and they still find disposing of those less profitable.

Thus, individual's investment in T-bonds is not hassle-free even now. The policymakers need to address the drawbacks to develop a vibrant bond market.

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