Exit costly T-bonds: Govt's new plan to ease interest burden

The government will buy back Tk6,667 crore of two-year Treasury bonds on 8 October in a move to better manage its domestic debt. This will be the first government bond buyback in 17 years.

Bangladesh Bank said yesterday that the buyback auction, under its Liability Management Operation (LMO), will cover bonds carrying a 12.30% annual coupon and due to mature on 6 November.

Under the auction format, investors will submit competitive bids indicating the prices at which they are willing to sell back their holdings. The government will then decide which offers to accept.

The central bank last conducted a government-securities buyback in December 2009, when it accepted offers worth Tk503 crore on the first day from four private banks and one non-bank financial institution.

Infograph: TBS

This time, the government is buying back the bonds mainly to spread out its debt repayments and avoid repaying a large amount at once when the bonds mature, Bangladesh Bank officials said. The move is part of the government's effort to reduce pressure from large debt repayments falling due at the same time.

A Bangladesh Bank official noted that executing the buyback a month ahead of schedule will help curb government interest expenses, effectively bringing the real interest rate below the coupon rate of 12.30%.

"The buyback auction will inject fresh liquidity into the banking system, which in turn should exert downward pressure on Treasury bill and bond yields. This will allow the government to secure future domestic borrowings at lower rates," the official said, adding that net government borrowing from the banking sector would also decrease.

However, central bank sources emphasised that the mechanism remains an exploratory exercise. "We want to observe how the market responds and evaluate whether this practice proves genuinely market-oriented," a senior Bangladesh Bank official said. He added that high yield rates in April had previously deterred the central bank from conducting a similar auction. Another senior central bank official clarified that although the buyback notice targets Tk 6,667 crore, the government is not obligated to purchase the full amount and may accept a lower sum depending on market yields.

According to the Bangladesh Bank notice, primary dealer banks can participate directly in the auction. Other banks and financial institutions can submit bids through linked primary dealers.

The government will pay the accepted price plus interest accrued up to the settlement date.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said, "By holding the buyback auction a month in advance, Bangladesh Bank can help reduce the government's interest expense to some extent. Besides, this will make the market more liquid and help keep interest rates lower."

He said, "The government will borrow a high volume at a low interest rate."

Md Mahmudur Rahman, Assistant Vice President, Wealth Management, Consumer Banking Division, Prime Bank said, "The buyback mechanism is a welcome development for Bangladesh's government securities market. It will enable the Government to manage its borrowing cost and maturity profile more efficiently, while providing investors with an additional liquidity window to rebalance or exit their Treasury holdings."

"Over time, this should contribute to a deeper, more efficient and more liquid G-Sec market," he added.