Smart investors loving T-bonds, bills for secured double-digit returns

Prioritising capital preservation with higher returns, smart investors are playing it safe by stashing their cash in treasury bonds and bills amid economic uncertainties and tightening monetary policies, say industry insiders.

The yield on three-month treasury bills has surged to 11.35%, marking a threefold increase over the past three years, while the yield on 10-year bonds reached a decade-high of over 12%, Bangladesh Bank data shows.

Treasury bonds and bills are debt securities issued by governments to raise funds. Bonds typically represent long-term debt instruments, while bills are short-term equivalents.

For individuals seeking to park a sizable amount, treasuries are currently offering the highest return among all the fixed-income opportunities. This is because reputable banks typically offer no more than 10% returns on term deposits. 

Meanwhile, the previously popular National Savings Certificates (NSC) have become less lucrative due to rate cuts down to 9%, and stricter due diligence requirements, as well as limits on investment amounts.

Smart investors did not overlook the opportunity in treasuries, allocating as much capital as possible to these securities. Treasury securities are regarded as zero default risk instruments as the financial market operates under the assumption that governments are the least likely entities to default on repayments. 

For instance, Brac Bank has already invested twice the required amounts in treasury securities. "Appetite for treasuries depends on interest rate cycle," said Md Shaheen Iqbal, deputy managing director of the bank heading its Treasury and Financial Institutions division.

Tightening money market prompted migration to bills and bonds

He said the current trend of allocating a larger portion of available cash into secured government instruments started around two years ago when the money market began to tighten and over time, this trend has continued as yields have increased, resulting in an accumulation of funds.

Data from the central bank also indicate an influx of funds into treasury bonds and bills. The government's outstanding treasury bonds, with tenures ranging from 2 to 20 years, reached a record high of Tk3.79 lakh crore in January this year, up from Tk1.55 lakh crore in 2019. Additionally, outstanding treasury bills, with maturities of 365 days or less, increased to Tk1.23 lakh crore from Tk45,000 crore in 2019.

The yield on two-year treasury bonds surged to 11.8% in February, up from 4.79% in December 2021, marking a more than twofold increase over two years.

At the end of September last year, out of the Tk4.29 lakh crore within the banking industry's liquid assets allocated to treasury instruments, Tk1.64 lakh crore exceeded the mandatory statutory liquidity ratio (SLR) requirement mandated by the central bank.

Historically, Metlife Bangladesh, a prominent life insurer in the country, has consistently favoured investing in government treasury securities. Approximately 80-90% of its gigantic Tk17,000 crore life fund has typically been allocated to these instruments.

Investments, especially good and secured ones, are vital for an insurance company for sustainable growth and meeting customer obligations, said Metlife Bangladesh CEO Ala Ahmad.

"We evaluate our investment options by thoroughly analysing the sector's capacity to contribute to Bangladesh's economic growth, offer us attractive returns, and provide investment security. Based on this, historically, the lion's share of our investment has been consistently made into Bangladesh government bonds," Ahmad added.

The growing yield has also enticed a multitude of institutional and high-net-worth individual investors towards treasury securities. This surge in interest has helped meet the government's escalating borrowing needs, particularly as it steers away from direct bank loans or National Savings Certificates, despite the anticipation of continued borrowing, especially given the consistently lower-than-expected tax revenue growth.

Other industries with surplus cash, such as insurance and mutual funds, followed suit, mirroring the actions of banks.
"Instead of chasing uncertain profits in riskier assets like stocks in a stressed economic environment, enjoying the double-digit short-term risk-protected return is universally a better choice for investment professionals," said Mir Ariful Islam, managing director of Sandhani Asset Management.

Corporate earnings took a hit from Ukraine war

Corporate earnings experienced sharp declines for two consecutive years until 2023, with an overall decrease of 9% in 2022 followed by a 25% drop in 2023. These declines were attributed to economic challenges stemming from the Ukraine war, while the stock market, correcting from its pandemic peak, was further constrained by restrictive measures such as the floor price.

A number of fixed-income mutual funds, introduced last year to capitalise on the potential in treasury securities, witnessed their assets under management doubling within six to seven months. This growth occurred as high-net-worth individuals, along with certain cash-rich corporations and institutions, allocated additional funds to these mutual funds for investment in treasuries.

Against the 0.6% return of the Dhaka bourse's broad index in 2023, the fixed income funds were generating around 10% return that translated to a higher effective return due to the tax efficiency of mutual funds.

For instance, UCB Asset Management initiated its fixed-income fund in the middle of the previous year with Tk50 crore. Managing Director and CEO Shekh Mohammad Rashedul Hasan stated that as additional investors came on board later, the fund grew to Tk100 crore by December.

"The most appealing aspect of treasury instruments is that no other risk-free asset provides such attractive returns when investing over a short timeframe," said the investment manager.

"Our fixed income fund generated nearly 10% annualised return in a 100-day investment horizon, while one must keep invested for several years in other fixed income options like Saving Certificates and Fixed Deposit Receipts for a similar return," Rashedul Hasan added.

Bonds a boon for investors now

Farabi Masum Khan, head of fixed income at LankaBangla Securities, said, "The beauty of having various liquid asset classes in a financial market becomes evident during times when companies endeavour to mitigate losses and stock prices experience pressure. In such an inflationary environment, the increasing yield in bonds serves as a boon for investors."

The bourses started trading treasury bonds in 2022 and his firm executed trading of treasury bonds worth Tk130 crore.

Ali Imam, a chartered financial analyst and CEO of Edge Asset Management, also witnessed the doubling of the size of its fixed-income fund last year. 

He said fixed-income mutual funds provide a new avenue for all investor types to access superior rates in tradable fixed-income securities, along with tax benefits and the flexibility to liquidate holdings without penalty in the event of early exits. This flexibility is attracting investors to fixed-income mutual funds.

Imam said his team anticipates a levelling off in treasury yields in the near future, prompting them to initiate positions in longer-term bonds with an eye on potential capital gains.

Tareq Ibrahim, CEO of CWT Asset Management, said in times of uncertainty regarding the direction of interest rates — whether they will continue to rise or start declining — professional investors tend to allocate more funds into short-term instruments to facilitate fund rollovers. When they anticipate the end of rate hikes, they shift towards longer-term instruments. This strategy is adopted because rising rates can lead to capital erosion in bonds, whereas falling rates may result in capital gains.

Less credit flow feared

Dhaka Chamber of Commerce and Industry President Ashraf Ahmed said the rising yield in bonds signifies monetary tightening. Throughout this cycle, individuals tend to prioritise risk-free guaranteed returns from treasuries over venturing into other businesses that entail risk.

Nonetheless, he added, this could decelerate the flow of credit, potentially depriving private companies and SMEs of the necessary financing. This could subsequently have adverse effects on the economy, investment, and job creation in the future.