How far are T-bonds from stock exchanges?

Had the initiatives continued to move at a pace as in 2019, the government's treasury bonds could now have been traded in the stock exchanges.

During the last one and a half years, the revenue authorities have removed major fiscal barriers identified by a committee, but potential investors are yet to get T-bills and bonds ready to be traded at the bourses.

The reality is – money and capital market regulators are still discussing which operational model would be fit for making T-bonds tradable in stock exchanges.

The 2019 plan seems to suffer the same old bottleneck – divergence of opinion from the two regulators.

However, some developments over the recent months are increasing investors' hope for a liquid market of the most reliable debt securities, which are yielding more than other fixed-income alternatives.

"Some 95% of work has already been done to build a vibrant secondary market for treasury securities. We are hopeful to see the remaining policy tasks done sooner and get the desired market," Bangladesh Security Exchange Commission (BSEC) Commissioner Professor Shaikh Shamsuddin Ahmed told The Business Standard.

The existing market for treasury bonds

Currently, there are 264 outstanding treasury bonds worth over Tk2.5 lakh crore, with 2-20 year tenures, while the market for treasury bills offering lower returns due to their less than one year tenure is much bigger.

Unlike other countries, the market is extremely concentrated within the interbank ecosystem under the Market Infrastructure (MI) Module of the Bangladesh Bank.

Banks mainly participate in the secondary buying-selling of treasury bonds and the trading turnover increased to a record high in December as the banking industry's liquid assets have nearly doubled in a year.

Also, any investor other than banks can participate in the trading through their treasury bond investment accounts, known as Beneficiary Participants (BP) accounts. The treasury operation department of banks acts as the facilitator of the trades in the central bank platform.

Last year, there were 2,000 BP accounts at best of which more than 80 were not active in treasury bond trading, which indicates the treasury bond market's detachment with public investors, while there are over 26 lakh Beneficiary Owner (BO) Accounts in the stock market.

Meanwhile, the Dhaka Stock Exchange (DSE) got 221 treasury bonds and bills listed in its debt board over one and a half decades ago, but there was no second trade since the debut. The cost of secondary market trading of the big-ticket instruments was the main reason behind that.

Based on the 2019 recommendations of a tripartite committee of the DSE, the BSEC and the Bangladesh Bank, the government has already paved the way for reducing the trading costs significantly through tax rationalisation.

The committee also recommended that treasury securities enjoy zero fees against their listing and delisting on the bourse, along with the recommendation for mandatory automatic listing of all the upcoming treasury bills and bonds.

 The remaining work

How the treasury securities can be widely tradable still remains a subject to decide on.

According to the latest documents that the BSEC sent to the Bangladesh Bank and the Ministry of Finance a month ago, several market models are being discussed for a mass secondary market of treasury bonds.

A technical committee presentation discussed the pros and cons of each of the models.

The main options are BA ID-based public trading and BO-ID Based exchange trading.

It appears that the Bangladesh Bank prefers that secondary trading of treasury securities remains ultimately within its own platform - the market infrastructure (MI) Module, which will integrate with the stock exchanges' system.

On the other hand, the capital market institutions prefer exchange trading through the BO IDs, like the trading of listed company shares.

Both the proposed models need to go through problem-solving and IT infrastructure building tasks.

 Which one would be better?

"The existing market infrastructure of the Bangladesh Bank is inefficient and not investor-friendly," said Asif Khan, CFA, managing partner of Edge Research & Consultancy and Edge Asset Management Ltd.

While a BO account opening takes only a day, the BP ID opening takes weeks.

"Most importantly, we have to open the BP IDs through the treasury department of a bank and there lacks the brokerage service like we are getting from the brokers at the bourses," he said.

Due to the lack of liquidity in the central bank platform, investors actually need to ask for a price quotation from their respective banks if they need to sell a treasury bond and in most cases, they have to sacrifice fair market prices.

Investors need the ease to instantly buy or sell, said Khan, who himself opened a BP account as he is respectful about the risk-free return from treasury bonds.

The banking industry is too underprepared to serve investors in trading treasury securities and the central bank is pushing for capacity building, said another CFA Charterholder Nazmul Ahsan, working as the head of Treasury Operations at Midland Bank Ltd.

However, until the actual exchange trading begins, the desired liquidity and popularity of treasury instruments are very unlikely, he said.

 The under-capitalised appetite

With the monetary loosening over a year, fixed income-seeking investors are now in a tight corner as they are getting less than a 4% annual return from fixed deposits if they prefer strong banks.

On the other hand, an individual cannot park more than Tk1 crore in the high-yielding National Savings Certificates as the government has capped the limit well.

As the treasury bonds, which are considered as the most secured investment tool, are yielding up to 50% higher than FDRs offer, demand for the government-issued debt instruments is increasing.

But, the absence of a mass secondary market is hindering the government's plan to popularise the treasury instruments, which support the government to finance its budget deficits and also offer cautious investors great alternatives.

Abdul Matin Patwary, the acting managing director of the DSE, told The Business Standard without full-fledged exchange trading of treasury bonds the secondary debt market will never be popular.  

Both local and foreign investors are waiting for exchange trading of the government securities, which can encourage more investments in listed equities too as a large number of institutional funds need a blended opportunity in stocks and debt securities, he added.

"Whichever module is finalised, stock exchanges need the treasury instruments onboard," said Abdul Matin, a fellow cost and management accountant.

"DSE is ready to prepare its IT platform within a few months based on the finalised model," he said.

Mamun-Ur-Rashid, managing director of the Chittagong Stock Exchange, said his team is ready to float the treasury instrument trading within six months after it gets the final go-ahead from the regulator.