Treasury Bills

Treasury Bills issued by the government as an important tool of raising public finance. It is a kind of short-term unconditional government debenture, issued and sells to meet short-term budget deficits or raise short-term funds for other needs. The government commits to pay the price and refund the principle to its holder unconditionally at the end of the bill maturity.

A Government Security (G Sec) is a tradable instrument issued by the sovereign Government. It acknowledges the Government's debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). Major G-Secs in Bangladesh are: a. Treasury Bills (T-Bills) b. Bangladesh Government Treasury Bond (BGTB). As per the agreement between The Government of Bangladesh and Bangladesh Bank in 1985 (Treasury rules-1998 (Appendix-1, Section-3) and Bangladesh Bank (BB) Order-1972, article 20 empowers BB to issue new loans and manage public debt for the Government. Main features of the T-bills are: It has three tenors- 91-day, 182-day and 364-day; secondly, Price is determined by the market; Thirdly, they are issued at a discount rate and redeemed at the face value at maturity; Fourthly, it is tradable in the secondary market. T-bills are issued in scripless form. The central Bank releases monthly calendar through BB website. Weekly (usually on Sunday) auctions of Treasury Bills are held following a pre-announced auction calendar with a specified amount. Bidders quote their prices. The Auction Committee determines the cut-off price from the offered prices. some benefits of T-bills ( Bonds) are: It is an absolutely risk free investment, since it is issued by the sovereign government; One can get the attractive rate of interest since the yield is determined in the market; Since these bonds are tradable in the secondary market, one can obtain instant liquidity by selling them in the market; All receipts of interest and maturity are fully repatriable in case of foreign investment; One can get the best services from Central Bank of Bangladesh which maintain fully automated scripless depository system named Market Infrastructure (MI) Module. Commercial banks and Non-Bank Financial institutions, Insurance companies, corporate, individuals, provident fund etc. can also participate in auction through PDs. Minimum bid amount is Taka one lac and its multiples. Individuals, foreigners and Institution’s residents in Bangladesh such as: Banks, non-bank financial institutions, Insurance companies, corporate bodies, Authorities responsible for the management of provident funds, pension funds etc. The settlement system for trading in Government securities, which is based on Delivery versus Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk. Banks and financial institutions can use government securities as collateral only to borrow funds in the repo market.

Initially, Treasury bills 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 number 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. At the end of FY 2021, the amount of treasury bills held by banks was 96.3 percent.

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 bill 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. Subsequently, the auction of the 2-year Treasury Bill was stopped to bring the prevailing trend of the Treasury Bill into line with international norms. In addition, the 28-day government treasury auction was closed from July 1, 2008 to avoid over-lapping as it resembled the 30-day Bangladesh Bank Bill. As a result, treasury bills for 91 days, 182 days and 364 days are in operation in the market. In addition to these, treasury bills are currently used for 14 days to control short-term liquidity (in 2021), if needed.

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 organizations 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 developments 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.

The yield structure of treasury bills takes various shapes depending on the liquidity situation of the money market. At the end of June 2021, huge liquidity in the banking system pushed the yield on treasury bills dropped to 0.52 percent up to 1.21 percent. The market yield for treasury bills for 91 days, 182 days and 364 days were 0.52%, 0.68% and 1.21% respectively. [Syed Ahmed Khan and Abdus Samad Sarker]

References BB, 2020. Report on government securities, 2019-2020. Retrieved on 09 December 2021 from www.bb.org.bd/en/index.php/publication/index; https://www.bb.org.bd/monetaryactivity/treasury.php; www.bb.org.bd/fnansys/govsecmrkt/faq.php