Bond Market

Bond Market any place or incidence of transaction in which any kind of bonds changes hands. Before independence, the use of bonds as a means of resource mobilisation was virtually non-existent in Bangladesh. Immediately after liberation, the government of Bangladesh reissued long-term bonds accepting the liabilities of the Income Tax Bonds and the Defense Bonds of the Pakistan government held by Bangladeshi nationals and institutions. The government also issued a 5% non-negotiable bond to Bangladeshi shareholders of nationalised industries. In addition, savings bonds were also issued to pay for the value of demonetised 100-taka notes in 1974. Most of these bonds are held by bangladesh bank.

The first effort to mobilise savings for use of development expenditure was the issue of Wage Earners Development Bonds in 1981 to be sold to Bangladeshi wage earners abroad. Later, a two-year special treasury bond was issued in January 1984 to be sold to individuals, public and private sector organisations including banks. In December 1985, another instrument, the National Bond, was issued to be sold to non-bank investors.

During the implementation period of the financial sector reform programme that took effect from 1990, nationalised commercial banks, specialised banks and development financial institutions had to make considerable provisions for huge classified loans. As a result, the capital base of those banks and financial institutions eroded severely and their viability was seriously threatened. In this situation, the government issued a series of bonds to restructure the capital base of these banks and financial institutions as well as to assume the liabilities of the bad loans made to a number of public sector organisations.

The government also issued some bonds for augmenting loanable funds for speacialised banks and financial institutions. Moreover, some bonds were also issued to mobilise funds for a number of public sector organisations like the T&T Board, Bangladesh Biman etc. Following is the list of bonds issued by the government on various occasions: 15-year treasury bond (recapitalisation and bad debt provisioning, issued 30.12.1990); 3-year Jatiya Biniyog Bond (national investment bond, issued 30.12. 1985); Interest-free treasury bond (issued 1988, withdrawn from 15.10.1993); treasury bond to specialised banks (isssued 2.5.1993); 3-year T&T bond (for digital telephone installation, issued 29.12.1993); 3-year special treasury bond (for reimbursement of losses on A/C of working capital, issued 1.7.1993); 15-year treasury bond (capitalisation, provisioning and agricultural loans write-off, issued 16.10.1993); 25-year treasury bond (jute sector liquidation, issued 1.11.1993); 3-year treasury bond (reconstitution of BSRS, issued 16.4.1994); interest free treasury bond (issued 30.6.1994) and 2-year treasury bond (issued 15.7.1995) for reimbursement of agricultural loan remission,); 3-year treasury bond (reimbursement of loss in jute sector, issued 1.7.1994); 3-year T&T bond (for digital telephone installation, issued 7.8.1994); 3-year treasury bond (reimbursement of loan loss in BADC, issued 29.6.1995); 3-year treasury bond (reimbursement of loan loss in BTMC, issued 29.6.1995); 3-year T & T bond (for digital telephone installation, issued 30.1.1995); 3-year jute treasury bond (for jute sector, issued 1.7.1995); 25-year treasury bond (jute sector liquidation, issued 30.6.1994); 5-year Biman treasury bond (to increase share capital of Biman, issued 29.6.1995); 3-year jute treasury bond (issued 1.7.1995); 25-year jute treasury bond (private banks jute loan liquidation, issued 1.7.1995); 15-year agriculture treasury bond (reimbursement of agricultural loan remission, issued 16.4.1996); 3-year T&T bond (for digital telephone installation, issued 30.11.1996); 3-year treasury bond (reconstitution of BSRS, issued 19.6.1997); 5-year Biman treasury bond (share capital, issued 1.4.1997); 3-year treasury bond (reimbursement of loan loss in BTMC, issued 26.5.1996); 3-year T & T bond (for digital telephone installation, issued 22.6.1999); 10-year jute treasury bond (for jute sector, issued 1.7.1995); 5-year Biman treasury bond (issued 25.5.1998); 5-year Biman treasury bond (issued 15.7.1998); 10-year BSC treasury bond (to meet the loss of BSC, issued 1.7.1998); 10-year jute treasury bond (for jute sector, issued 1.7.1995); 3-year T&T bond (issued 18.8.1999); and 3 year treasury bond (bad loan provisioning, issued 1.1.2000).

Marketability of bonds issued in the country was very limited up to 2005 as there was no secondary market for trading of these instruments. The banks, majority of which were government owned, held these bonds. There were provisions for holding of these bonds by the individuals and non-bank financial institutions also but response from them was minimum due mainly to maturity profile and non-flexibility in the rate return offered on those instruments. These were held by the banks due to the government allocation system, as well as to maintain statutory liquidity requirements (SLR). So, essentially it was a captive market.

In October, 2004 Islamic Investment Bonds (Islamic Bonds) in accordance with Islamic Shariah was introduced for investments by the Bangladeshi Institutions and individuals and non- resident Bangladeshis, who are willing to share profit or loss. These Bonds are of 6-Month, 1-Year and 2-Year maturities and are quite attractive to the investors due to short maturity profile and flexible attractive return.

To mobilise long-term fund from domestic sources for financing government expenditure programme Bangladesh Government Treasury Bonds (BGTB), bearing half yearly interest coupons, with tenors of 5-year, 10-year, 15-year 20-year have been introduced. These bonds are issued at par through yield based multiple price auction mechanism held in Bangladesh Bank with effect from 2007. Individual and institutions resident in Bangladesh are eligible to purchase these. Non-resident individual and institutions also are eligible to purchase these with foreign currency but are not allowed to sale within one year of purchase. In accordance with government fund raising programme, bonds are issued by the Bangladesh Bank through auction system at cut-off prices. Auctions are held as per auction calendar prepared and announced prior to each financial year on the basis of government debt management strategy. The Primary Dealers act as the underwriters and market makers with commitments to bid in auctions. The unsold portion of the bond in any particular auction is devolved to the primary dealers. The bonds (Primary Issues) are issued by Bangladesh Bank, at coupon rates, which are determined at the auction dates and are payable at six monthly intervals from the date of issue. Banks and financial institutions maintaining current account with Bangladesh Bank including the PDs, may submit bids on own account and on behalf of others for face value amount in multiples of Taka 1.00 lac. Separate bids for shall be submitted for bonds of different maturities. Bangladesh Bank also participates in bond market (both primary and secondary) for maintaining desired yield curve on residual amount not accepting by the market participants. Allowing market first, Bangladesh Bank assumes position for market development as well as macroeconomic stability of the country.

The most important event in the history of Bond market in Bangladesh is that from January 10, 2005 Bonds are being traded in the secondary market. A total of 18 Bonds were listed in Dhaka Stock Exchange for trading in the market. It may be noted that Bangladesh Bank appointed primary dealers to facilitate development of bond market in the country and till today (August, 2010) 12 Primary Dealers comprising of banks and non-bank financial institutions are engaged in freely sale /purchase of bonds issued through auction mechanism. Primary dealers also get necessary support from Bangladesh Bank in case fund shortages.

Since government is the single borrower in the bond market, the rates offered in other government savings instrument basically determine the yield structure of bond market. Given the nature and duration of maturities, yields had been relatively low for the bonds issued in the market as compared to the government savings instruments. This is clearly against the traditional rule of high- risk-high-return and vice versa which significantly impeded the growth of bond market in the country. Recently a declining trend in interest rate is being observed in the bond market, generating a relatively flat yield curve at the long end which desirable in anchoring inflation. The weighted average coupon rates on all tenors of bonds decreased to 9.20-13.07% at the end of June 2009 compared to 10.60-15.95% at the same date in the preceding year.

Despite all these development, the overall situation of bond market in Bangladesh is not satisfactory due to absence of corporate bonds. The presence of a vibrant corporate bond market has strong and positive effect in reducing dominance of bank lending in private enterprises and ensure competitive structure of rate of interest in the economy reflecting opportunity cost of money which is still lacking. [Syed Ahmed Khan and A Samad Sarker] [Khan, Sayed Ahmed General Manager (research), Bangladesh Bank]