20-year treasury bond auction sees unusual fall of interest rate

While the interest rates for all tenors of treasury bills and bonds have been consistently increasing over the past two months, the latest auction saw a decrease in the interest rate for the 20-year treasury bond compared to the previous one.

According to central bank data, auctions for 15-year and 20-year treasury bonds, each worth Tk1,000 crore, were held today. In these auctions, the interest rate for the 20-year treasury bond decreased by 8 basis points, settling at 12.46%. Previously, this bond had an interest rate of 12.54%.

However, the interest rate for the 15-year treasury bond followed the expected trend and increased compared to the previous auction. The interest rate for this bond rose by 12 basis points, reaching 12.40%. In the March auction, the interest rate for this treasury bond was 12.28%.

Several policy-making officials from both state-owned and private banks have told TBS that such a contrasting movement in the interest rates of two treasury bonds auctioned on the same day is not very typical. 

The central bank sold a larger quantity of bonds under non-competitive bids to individuals, provident funds, gratuity funds, or any kind of welfare funds, which prevented commercial banks from participating properly in the auction. Consequently, the treasury bond rate decreased.

The head of the treasury department at a leading private bank said according to the central bank's 2016 directive, 30% of the treasury bills and bonds offered at auction are supposed to be sold under the non-competitive category, and 70% to state-owned and private Primary Dealer banks at competitive rates. 

"However, in the latest auction of the 20-year treasury bond, the central bank sold more than 50% of the bonds under the non-competitive category. As a result, less was borrowed from the Primary Dealer banks," he said. 

Typically, if more is borrowed from commercial banks through treasury bills and bonds, the interest rate increases, the banker said. "Since less was borrowed from the Primary Dealer banks compared to the usual percentage, the rate of the bond decreased," he said.

This experienced banker also commented that although there is a rule allowing for the allocation of additional bonds in the non-competitive category beyond the policy guidelines, the Primary Dealer banks were not informed of this through any circular or official letter.

'Central bank follows regulations'

Referring to the central bank's adherence to all regulations in conducting the treasury bond auctions, Arief Hossain Khan, executive director and spokesperson of the Bangladesh Bank, said an internal decision regarding the central bank's bill and bond auctions has recently been made. 

"According to this decision, the auction committee for bills and bonds will determine the percentage allocation for the non-competitive and competitive categories," he said. 

Arief further said that the central bank is currently prioritising the non-competitive sector primarily to establish a base for the treasury bill and bond market.

He commented that the issue of allocating additional bonds in the non-competitive sector has been discussed multiple times in meetings with the Primary Dealer banks. 

The central bank spokesperson said, "This is not the first instance of additional allocation to the non-competitive sector; the central bank has done so many times before. All the Primary Dealer banks are aware of this."

Arief mentioned that there was an opportunity to borrow five times more under the 20-year bond if the rate had not been lowered. "We informed the government that there were many more bids to purchase this bond. If the government wished, it could have borrowed Tk5,000 crore from this."

However, he added, "The government told us that at this moment, the funds required according to the government's auction schedule would suffice. Therefore, we have only sold Tk1,000 crore worth of bonds as per the auction."

Another policymaker from the central bank said that in the most recent auction of 20-year bonds, funds from a mutual fund and a provident fund were invested. "These two institutions alone purchased bonds worth Tk600 crore. In addition, other individuals and institutions also bought bonds, resulting in a smaller share for the primary dealer banks."