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Treasury Bills

Treasury Bills issued by the government as an important tool of raising public finance were of three types, although all of them were 90-day bills. Among these three types, bulk was represented by ad-hoc treasury bills issued to meet the cash balance need of the government. A second type was the 3-months treasury bills on tap introduced in August 1972 and their purpose was to mop up the excess liquidity of banks. The third type was the 3-months treasury bills introduced for subscription exclusively by the non-bank financial institutions, non-financial enterprises and the public.

Initially, a limit of Tk 250 million was set for the issue of such treasury bills. Later this limit was withdrawn and bangladesh bank was empowered to issue any amount of treasury bills for the non-bank public. Despite the withdrawal of the limit, the holdings of non-banking sectors remained small and commercial banks comprised the main market for the treasury bills. These bills continued to be reissued in every ninety days. In December 1994, however, treasury bills on tap and the treasury bills for non-banks were abolished. The holdings of treasury bills by the deposit money banks generally did not exceed the amount needed to meet the liquidity requirement. A substantial part of the treasury bills issued, therefore, needed to be held by Bangladesh Bank. Of the total treasury bill holdings, the amount of holdings by the deposit money banks was 57% at the end of 1973 and amidst fluctuation, they came down to 27% at the end of June 1982. Later, the share started to rise and stood at 68% at the end of 1992. Thereafter, it fell sharply and came down to a lowest minimum of 4% at the end of June 1995.

That the Bangladesh Bank bills were allowed as approved securities for the statutory liquidity requirement of the banks and these bills were of yields higher than the treasury bill rate, might have induced the banks to reduce their holdings of treasury bills. This trend continued up to February 1997. In March 1997, the auctioning of Bangladesh Bank bills was suspended and only the 90-day treasury bills were sold through auction. Up to 25 October 1995, the treasury bills of ninety days maturity were sold at pre-determined rate, usually fixed time to time by the government. Thereafter, these were sold through auction at market determined rate of interest. Subsequently, on 7 February 1996, the government introduced 30-days and 180-days treasury bills and on 16 March 1997, 1-year treasury bills for auction. Up to August 1998, four categories of treasury bills viz, 30-day, 90-day, 180-day and 1-year bills were sold regularly through weekly auction basis. From 6 September 1998, these were replaced by newly introduced 28-days, 91-days, 182-days, 364-days, 2-years and 5-years treasury bills. With the introduction of repo and reverse repo systems as tools of monetary policy in 2003, a new scope was created for the treasury bills in the money market. Banks and financial institutions had no short-term liquidity management tools. So these organistions were allowed to use treasury bills as securities for enjoying repo facility from Bangladesh Bank. Despite the application of reverse repo auction to supplement the treasury bill auction for controlling the liquidity of banks, treasury bill is being used as an outstanding tool of monetary policy. Bangladesh Bank takes initiative to sell Treasury bill for reducing excessive liquidity increased due to the growth of export sector and the increase of remittance flow. As a tool of government loan, Treasury bill was also allowed to accept as a security in the inter bank repo market. The auction of 5-years term treasury bill was stopped from 2004. Bangladesh Bank appointed nine primary dealers in 2004 to extend support and strengthen for developing the secondary market of the government treasury bills and other machineries of government loan. Later three more dealers were appointed and those agents actively participate in auction to enhance the number of subscribers both at individual and institutional level. In the auction process, the French system of auctioneering for the treasury bills is followed and the treasury bills are issued accordingly. Treasury bills ranging from the minimum yield to the amount of given yield fixed for the auction is issued by them. The distribution of treasury bills is also held proportionate by at the cut off price. One of the landmark development that took place in the treasury bill market on 20 October 2003 is the market started transaction through electronic system. Since then, the on-line transfer process of treasury bills among the banks and financial institutions is being done. This new marketing strategic management is expected to be helpful for strengthening and widening the country's money market.

A market based auction system of treasury bills was introduced from the FY of 2007-08. Under the system, an auction calendar mentioning the date and the amount of price is prepared and made public every year. However, the transaction of the treasury bill of 2 years term has been stopped following the international rules relating to the terms of treasury bills. Moreover the auction of treasury bill having 28 days validity also suspended from 01 July 2008 to avoid overlapping with the 30 day Bangladesh Bank Bill. Following these steps only three categories of treasury bills namely 91-day, 182-day and 364-day bills are now (2012) available in the market for transaction.

The yield structure of treasury bills takes various shapes depending on the liquidity situation of the money market. During the FY of 2009-10, the yield of treasury bills of different terms by the end of June increased to 8.6% from 3.02% due to huge liquidity with the banks in the market. By June 2008, the rate was 7.28% to 8.48%. [Syed Ahmed Khan and Abdus Samad Sarker]