Bond Market

1. Bond Market Bond markets in most countries are built on the same basic elements:  • a number of issuerswith long-term financing needs • investorswith a need to place savings or other liquid funds in interest-bearing securities • intermediariesthat bring together investors and issuers • Infrastructurethat provides a conducive environment for securities transactions, ensures legal title to securities and settlement of transactions, and provides price discovery information.  • Regulatory regimeprovides the basic framework for bond markets and, indeed, for capital markets in general.  Efficient bond markets are characterized by a competitive market structure, low transaction costs, a robust and safe market infrastructure.  

2. Government Bonds & their Importance An important element of a domestic bond market is the government bond market.  • At the macroeconomic policy level, a government securities market provides an avenue for domestic funding of budget deficits and avoid a build-up of foreign currency-denominated debt.  • A government securities market can also strengthen the transmission and implementation of monetary policy, including the achievement of monetary targets or inflation objectives, and can enable the use of market-based indirect monetary policy instruments.  • The existence of such a market enable authorities to smooth consumption and investment expenditures.

3. Bangladeshi Bond Market: • Bangladesh's bond market represents the 'smallest' in South Asia, accounting for only 12 per cent of the country's gross domestic product (GDP). • In the region, Sri Lanka appears to have the largest bond market based on the value of outstanding bonds as percentage of GDP. • India's bonds amounted to 35 per cent of GDP while Nepal's domestic bonds were 15 percent. Sri Lankan bond market accounts for almost 51 per cent of its GDP, comprising entirely of government bonds. • There are very few corporate bond in the region, banks still constitute the main source of funds for the corporate sector. • In Bangladesh, the bond market has only eight corporate bonds. All were issued through private placement partly because of the public's little confidence in corporate debt stemming from the large-scale default of publicly offered corporate bonds.

4. Bangladesh’s New Bond Offer: • Banglalink plans to raise $102m through the biggest corporate bond deal. • The deal, while small in global terms, is an indication that investors are becoming more confident in Bangladesh, a country identified by Goldman Sachs as one of the N-11 (Next Eleven) markets to watch in the 21st century. • Citi Bangladesh, arranged the deal. The Orascom bond shows that it’s possible to raise sizable amounts of financing from the local market. The senior secured bonds are denominated in the Bangladeshi taka. They have a 13.5 per cent coupon rate payable every six months and are due in 2014.

5. Impediment of the Bangladesh Bond Market: 1)Issuers: • Bangladesh lacks a significant number of potential, good-quality issuers. Most private sector enterprises are small and owner-run, many are of “cottage size” and most are in the garment industry, which to date depends largely on short-term bank loans for financing. • These enterprises could benefit from longer-term funding but are neither large enough nor well known enough to issue bonds. • Most of the large-scale industrial units and commercial enterprises are state owned. Their shares are not listed, and they do not offer debentures since their financing needs are met by the government or by the state-owned Banks.

6. Barriers continued: 2)Investors: • About 80% of the base is made up of retail investors, whose primary concerns include the equity at the stock exchange or the government savings certificate. • Of the few institutional investors that could support a bond market, most are either prevented from investing in corporate bonds by restrictive guidelines or are not professionally managed. • The majorinstitutional investors are the Investment Corporation of Bangladesh—and the insurance companies.

7. Barriers Continued: 3) Intermediaries: • Intermediaries in Bangladesh lack many of the skills needed to foster an active local corporate bond market. Commercial banks dominate the financial sector and not enough intermediaries are skilled in securities. • Too few private merchant banks are able to conduct financial advisory and trust services. Nor do any feel motivated to become a market maker for an issue. Even if they are able to participate, intermediaries are reluctant to take any risk in dealing