‘To popularise treasury bonds, the govt must stop relying on savings certificates’

The eagerly anticipated trading of treasury bonds in the stock market may begin as early as this month. Reports suggest the key stakeholders will sign an operational agreement later this month. The country's stock exchanges are now dominated by equity instruments. The introduction of T-bonds will add some variety to the market. As debt instruments, it can also help diversify the market. The Business Standard caught up with Shahidul Islam, chief executive officer of VIPB Asset Management Company to delve deeper into the topic.

The trading of treasury bonds in the stock market may begin this month. What is your opinion regarding the initiative?

There is already a market for treasury bonds, the secondary market. One can trade bonds there through banks. Mostly, institutions participate in that market at the moment. Banks themselves participate, other institutions participate through banks, and a few individuals participate as well. But participation at an individual level is not widespread because the current platform is an over the counter platform for banks.

When the bond will be traded through the stock market it will open the door for widespread participation. Firstly, investors who already have a Beneficiary Owner's (BO) account or are linked to the stock market, up until now, could only invest in stock using their BO accounts, but now they can invest in government bonds as well.

They could already purchase bonds through banks, but making bonds accessible through the stock market makes things convenient. They can trade the bonds through the same BO account they use to trade stocks.

This is a great initiative. Government bonds are a risk-free instrument since the government never defaults. If someone buys this bond they will certainly get back the principal and coupons as well. There is no credit risk for investors. For investors who consider the stock market risky and those who find analysing the fundamentals of companies tedious, this is a great option.

Valuing the stocks of companies is quite difficult for ordinary investors. Many investors are averse to risks and the appetite for risk is not the same in everyone. For people like these, this will be a good instrument.

Another popular instrument is the savings certificate, which is also a government instrument. Investors can buy this instrument as well, it is also risk free. But one disadvantage of the savings certificate is that it has no liquidity.

Once you buy it you can't sell it to another person. Either you have to hold it till maturity or surrender it back to the government after a year but in this case, your return will be lower. Simply put, you cannot sell it off whenever you want.

However, when you buy a treasury bond from the share market, firstly you are investing in a risk free investment, so your money is safe. At the same time, this instrument has liquidity, if you need money you can sell it off.

Another thing is since the savings certificate offers high-interest rates, the government has set a limit on how much an investor can invest in saving certificates. But the same thing won't happen to treasury bonds, as it is issued at a market rate.

If someone wants to invest more, they can. There is no preferential rate in this case, like a savings certificate. It offers a market driven interest rate, so one can invest more if they wish.

People invest a lot in government bonds all over the world. In our country, it is quite low. People prefer the savings certificate here. But I think the government wants to make investments in treasury bonds more widespread.

Because if the government borrows through savings certificates the cost of money is higher for them, due to the high interest rate. When it comes to bonds the rate is a little lower. The advantage for investors is that they can invest in a risk free instrument without any ceiling.

What are the challenges faced by this initiative? And what can be done to overcome these challenges?

The first challenge is people's lack of knowledge and awareness. There is a lack of understanding among the common people about this type of bond. When someone buys a government bond that matures after 10 years and they try to sell it after two years, what would be the value of this bond? This valuation can be a challenge for the average investor.

The value of any security like stock, bond or government bond depends on the prevailing investment environment. Like I said earlier, there is no risk of default when it comes to government bonds; if you hold a 10-year government bond for 10 years the government will pay you the principal.

Year on year, every six months they (the government) will give you payment coupons. But if you try to sell the same bond after just one year you will have to sell at the market rate. The prevailing market situation then will determine the price.

An investor will have to understand how long till the bond matures, how many payment coupons remain and evaluate the price of the bond based on these. These are the technicalities. However, this is easier than dealing with stocks.

When you analyse the cash flow of a stock and do a valuation based on that, it is more complicated. When you do a projection on how much profit a company will make and how much dividend it will pay, it is very challenging to determine. Compared to that, it is easier to know when the government will hand out the coupon and what it's worth.

There is also another challenge. There are a few corporate bonds listed on the stock exchange and the trading mechanism of these bonds needs to be rationalised. Even if you trade one bond there is a fixed cost. In order to popularise bonds, trading commission or trading costs need to be rationalised.

The commission for stock trading is a percentage of the trade value. If it is 0.2% of the trade value, that means if you trade stocks worth TK100 you will have to pay a commission of 20 paisa. But the case is not the same for bonds, so we need to do something similar in the case of bonds.

The commission rate should in fact be lesser than stocks because the returns from a fixed income instrument like a bond are also lower.

Whether you buy one bond or one hundred you have to pay a certain amount to Dhaka Stock Exchange (DSE); everything should be a variable, not a fixed cost.

Earlier, government bonds, with an aggregate value of Tk550 billion, were listed with DSE between 2005 and 2011. But trading never took off. What do you think was the reason behind this failure? How do we evade a similar fate this time?

Back then, the bonds were listed but the mechanism to trade them was never established properly. The mode of operation was never established. How the buying and selling will take place, how will settlements be done were never confirmed. So, the listing remained just a formality. But this time a proper mode of operation is being set up, I believe.

To popularise the government bond the government must stop being so reliant on savings certificates. A large chunk of the government borrowing comes from savings certificates. The government also pays more interest for saving certificates.

If the government pays a lot more interest for savings certificates people will be interested in only buying saving certificates. So, the interest gap between these two instruments must be narrowed down. Otherwise, people won't buy bonds and continue to prioritise the savings certificate despite its disadvantages.

In May, 37,243 BO account holders sold off all their stocks in just 11 days in the DSE. How will the move to introduce treasury bonds impact the stock market?

The stock and bond indexes will be different. Yes, this move will provide investors with more options but I don't think this move will rejuvenate the stock market.

A bond is a fixed income instrument so it is an alternative to a savings certificate and FDR. Stock means ownership, you are buying and selling the ownership of a company. A bond on the other hand is a loan product/debt instrument. But yes, being able to invest in two asset classes from the same BO account will make life easier for investors.