FE Report (June 13, 2011)
The budgetary move to allow investment of undisclosed money in government bonds won't bear any fruits as the secondary market where these instruments are to be traded remained inactive since 2004.
Dhaka Stock Exchange officials said the secondary bond market was introduced seven years ago at the behest of the International Monetary Fund, but it never took off due to poor interest rates and institutional bottlenecks.
Unlike in the West and major emerging nations where equity and bond markets compete for investors, Bangladeshi authorities could never introduce an effective system to trade government bonds in the secondary market.
"It is hard to understand how undisclosed money can be lured to buy bonds when transaction for such instruments in the secondary market remained inactive for a long time," said Salahuddin Ahmed Khan, an ex-chief executive officer of DSE.
Khan, also a finance professor at Dhaka University, raised questions about sincerity in the government's latest move, saying the authorities should have put in place an effective trading system first before allowing the opportunity in the secondary market.
DSE officials said there have been no "different parameters" for bond trading in the country's premier stock exchange, which make bond transaction virtually impossible in the secondary market.
"That's why bond trading has been inactive by default for years," said a DSE office-bearer, adding the government should seek expertise from international agencies so as to make the secondary market effective.
"A secondary bond market is essential for the country's economy and for the country's millions of investors who look out for safe investment tools. In the West, when equity market suffers, bonds gain," he said.
The official added poor interest rates of the government bonds also make them unattractive for local buyers.
"We know how important the secondary bond market is. But if the interest rate is low and hardly has any chance to outperform equity market, why should an investor buy bond in the secondary market?" he said.
In a developed market there are different parameters for equity and bond market, which allow them to function effectively side by side.
In the budget, the finance minister has allowed investment of undisclosed money in the treasury bonds with a penalty of 10 per cent tax.
Presently, government bonds having four different tenures --- five, 10, 15, and 20 years --- are listed in the stock market. The interest rate varies according to the tenure of the bond.
There are now 212 government bonds listed in the DSE having interest rates ranging from 7.5 per cent to 9.5 per cent. Each of these bonds has a face value of at least Tk 0.1 million.
When asked about the present status of bond market trading, DSE senior vice president Ahsanul Islam Titu said bond transaction now occurs only in the primary market and is limited among the institutional investors.
Every week the bonds are being transacted through an auction. There are 13 primary dealers --- mostly banks and non-banking financial institutions - who do the transaction.
"If the government really wants to activate the secondary market for bond trading, first of all it has to stop trading of such bonds through primary dealers," Titu said.
"We welcome the government's budgetary move to allow investment of undisclosed money in government bonds. But the government should also take necessary steps to make the secondary bond market a reality," he said.
Apart from the government bonds, three corporate bonds are also listed in the DSE. All of them are trading below their face-value.
Even the interest rates of these corporate bonds are higher than that of the government bonds, DSE officials said.
"To minimize the risk of investment, it is essential to activate bond market. A lot of investors will be interested to invest in bonds once they see better return for their investment," another official added.
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