But what are government bonds? What determines how much investors will pay for them? And what can bond “yield curves” tell us about an economy?

Consider a government whose outlays exceed its revenues by $100. To finance the deficit, it can borrow from investors by issuing a bond. The bond is a promise by the government to pay back the $100 principal to investors at a future date, plus annual interest, called a coupon payment, to compensate investors for the opportunity cost of parking their funds in the bond rather than some other investment.

This opportunity cost has two components: an inflation component (to preserve the purchasing power of investors’ money) and a real, inflation-adjusted, component (the additional return, on top of inflation, investors might forgo on alternative investments). The higher the expected rate of inflation and returns on alternative investments, the higher the return the government must generally offer investors.

Suppose the government issues a one-year $100 bond, or bill, with a coupon rate of 5 percent. This is a commitment to pay back investors $105 after one year: $100 in principal, $5 in interest. If the coupon rate equals the investors’ opportunity cost, investors will be willing to buy the bond at its face value, or at par ($100, in this example).

But if investors’ opportunity cost exceeds the 5 percent coupon, they will buy the bond only at a price below par. Say they are willing to pay only $98. This would provide a higher return on their investment, specifically 7.1 percent [(105÷98)-1]. This total return, which by definition equals investors’ opportunity cost, represents the bond’s yield (or yield to maturity).

Primary and secondary markets

A direct bond sale by the government to investors is a primary market transaction. But bonds can also change hands between investors in the secondary market. This is because bonds are tradable securities, like stocks. The key implication is that the issuance yield on a bond can differ from the prevailing market yield.

For instance, let’s assume that a major commercial bank fails immediately after the government issues the $100 bond above. This fuels fears of a financial crisis and recession. As investors come to expect smaller returns and lower inflation because of the recession, the opportunity cost of funds falls sharply, from 7.1 percent to 3 percent. In this situation, the bond issued at $98 will now trade above par in the secondary market, at $101.95, to reflect the new market yield of 3 percent.

Governments can issue bonds of different maturities, typically ranging from 1 to 30 years. Each bond has its own coupon rate and associated yield to maturity. Longer-term bonds usually carry a higher yield. This is called term premium. It reflects the additional compensation investors demand for the uncertainty associated with future inflation and economic conditions, and for forgoing other investments for longer.

Chart 1 plots bonds’ maturities on the horizontal axis and their corresponding market yields at a given time on the vertical axis. These yield curves tell us many things—the most important is whether markets expect the economy to strengthen or weaken.

Let’s assume markets expect economic growth to accelerate. This means future inflation will likely be higher than present inflation: As the economy heats up, demand for goods and services will pick up and eventually feed into prices. The lure of alternative investments, such as commodities or property, will also rise as economic activity strengthens. Both these factors mean investors will demand a higher yield on a longer-term than on a shorter-term government bond. In other words, the yield curve will slope upward—as was the case for the US on December 16, 2024 (see red line).

Are yield curves always upward-sloping? No. When US inflation spiked following the COVID-19 pandemic, the Federal Reserve hiked interest rates. Because higher interest rates typically dampen household consumption and business investment, the hike fueled expectations of an economic slowdown, weaker inflation, and lower economic returns. Reflecting these market expectations, the government yield curve began to invert, or slope downward (see blue line). An inverted yield curve is often seen as a recession predictor, and, until recently, inversions preceded every US economic contraction for the past half century.

Country risk premium

Do yield curves of government bonds in emerging markets and low-income countries convey the same information as those of advanced economies? Yes, but with a greater focus on country risk premium. Major advanced economies are diversified, and their institutions are strong. Their sovereign bonds are generally considered safe because investors are almost certain the government will pay them back. The same cannot be said for all developing economies, which typically have weaker institutions and are more prone to shocks that can lead to large currency depreciations, rapid inflation, and loss of access to market funding.

Some developing economy governments—especially those with lots of foreign-currency debt—must sometimes restructure their debt (change their bonds’ repayment profile, yield, or both). This default risk, or country risk premium, means their bond yields are generally higher than those for advanced economies across all maturities. This difference in bond yields, or spread, is an important indicator of sovereign credit risk (see dark gray line).

When country risk reaches a point where markets see debt restructuring as imminent, the yield on bonds with short residual maturities typically spikes, producing a sharply inverted yield curve. In early 2014, for instance, nobody knew that Ukraine would restructure its sovereign bonds within a year. But the March 2014 inverted yield curve showed that investors were already pricing in a debt event. Because such operations involve a bigger extension of the residual maturity of bonds falling due sooner (in 2015, say) than those due later (2018), investors demanded a higher yield on the former than the latter (see yellow line).

Developing bond markets

Many developing economies are working to develop the market for local-currency government bonds to reduce reliance on foreign-currency borrowing, which carries exchange rate risk. Putting in place the requirements for such a market—sound debt management, robust laws, regulations and market infrastructure, and a diversified domestic investor base—can take time, but the rewards are substantial.

The IMF, together with the World Bank, provides active guidance to governments in this area. It’s encouraging that many developing economies, notably in Asia and Latin America, have made progress on this front in recent decades.

A yield curve in a well-functioning government bond market not only tells us something about the economy’s outlook, but is also a benchmark for pricing other financial assets, such as long-term bank loans, corporate bonds, and mortgages. It facilitates more efficient allocation of resources and thus supports long-term economic growth.

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The cut-off yield, generally known as the interest rate, on the BGTBs rose to 12.39 per cent on the day from 11.48 per cent earlier, according to auction results.

Most banks are reluctant to invest their excess funds in government-approved long-term securities due to the ongoing uncertainty about future liquidity in the market, according to market insiders.

The banks were keeping a watchful eye on the possible impact of phasing out the 28-day repo facility on the market, they explained.

The Bangladesh Bank (BB) phased out its 28-day repo facility from April 10, aiming to reduce banks' reliance on the central bank’s liquidity support and encourage them to manage their liquidity independently.

The government borrowed BDT 35 billion by issuing BGTBs on the day to partially meet its budget deficit.

Besides, the government borrowed BDT 5.0 billion on the day through reissuing Three-Year Floating Rate Treasury Bonds (FRTBs).

The cut-off yield on the FRTB rose to 13.15 per cent on the day from 12.49 per cent earlier.

“The earlier auction of the FRTBs held on Tuesday last week was cancelled due to a technical glitch,” a central banker told media.  

The FRTB is a bond bearing a coupon which is determined depending on the benchmark 91-day Bangladesh Compounded Rate (BCR).

The BCR is a daily rate based on the cut-off yield on 91-Day Treasury Bills (T-bills). This is a reference rate which is primarily used to set the rate of floating-rate instruments of the government.

Currently, five government bonds, with tenures of two, five, 10, 15 and 20 years respectively, are traded on the market.

Besides, four treasury bills (T-bills) are transacted through auction to adjust government borrowings from the banking system.

The T-bills have 14-day, 91-day, 182-day and 364-day maturity periods.

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US President Donald Trump abruptly backed down last week in his global trade war with a 90-day tariff pause for most countries ---but the government raised 33 per cent gas price on Sunday.

Moreover, the ongoing upward trend of yields on government securities also made investors cautious in putting money in stocks at this time.

Following these development, the prime index of the Dhaka Stock Exchange (DSE), went up by 0.83 points or 0.01 percent to 5,170 at 11:00am, when the report was filed.

The DS30 index, a group of 30 prominent companies, shed 5 points to 1,907 while the DSES index, which represents Shariah-based companies, saw a fractional gain of 0.13 point to 1,166 till then.

Turnover, another important indicator of the market, stood at BDT 1.40 billion till then.

Of the issues traded till then, 168 advanced, 126 declined, and 90 issues remained unchanged on the DSE trading floor till then.

Beximco Pharma was the most traded stock with shares worth BDT 100 million changing hands till then.

On the other hand, the Chittagong Stock Exchange saw an upward trend till then with its All Shares Price Index (CASPI)—gaining 20 points to 14,490 while the Selective Categories Index – CSCX rose more than 15 points to 8,824 till then.

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The cut off yield, generally known as interest rate, on the BGTBs rose to 12.55 per cent in the immediate past auction from 12.44 per cent earlier.

The government is set to borrow BDT 25 billion through issuing the BGTBs on Tuesday to partially meet its budget deficit.

Currently, five government treasury bonds, with tenures of two, five, 10, 15 and 20 years respectively, are traded on the market.

Besides, four treasury bills (T-bills) are transacted through auction to adjust government borrowings from the banking system. The T-bills have 14-day, 91-day, 182-day and 364-day maturity periods.

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The cut off yield, generally known as interest rate, on the 91-Day T-bills came down to 11.65 per cent in the immediate past auction from 11.71 per cent of the previous level while the yield on 182-Day T-bills stayed at 11.90 per cent from earlier level.

However, the yield on 364-Day T-bills remained unchanged at 11.99 per cent on the day from the previous level, according to the auction results.

The government is set to borrow BDT 80 billion on Sunday through issuing three-type of T-bills to meet its budget deficit partly.

Currently, four T-bills are transacted through auction to adjust government borrowings from the banking system. The T-bills have 14-day, 91-day, 182-day and 364-day maturity periods.

The bills are short-term investment tools issued through auction, conducted by the central bank on behalf of the government.

Furthermore, five government bonds, with tenures of two, five, 10, 15 and 20 years respectively, are traded on the market.

BBN/SSR/AD

The cut off yield, generally known as interest rate, on the BGTBs came down to 12.38 per cent on the day from 12.45 per cent earlier, according to the auction result.

The government borrowed BDT 30 billion through issuing the BGTBs on the day to meet its budget deficit partly.

Currently, five government bonds, with tenures of two, five, 10, 15 and 20 years respectively, are traded on the market.

Besides, four treasury bills (T-bills) are transacted through auction to adjust government borrowings from the banking system.

The T-bills have 14-day, 91-day, 182-day and 364-day maturity periods.

BBN/SSR/AD

1.

Added VAT Burden Looms as Govt Races to Meet IMF's Revenue Target: Amid high inflationary pressure, consumers may face an added tax burden as the government plans to remove reduced VAT rates on certain products to meet the IMF's target of generating an additional Tk12,000 crore in revenue this fiscal year. To meet the global lender's revenue target, authorities are considering applying the standard 15% VAT rate on the assembly, raw material imports, and retail stages for locally produced mobile phones and refrigerators. (The Business Standard)

2.

NBR Conducts Drive at Resort of ex-DB Chief’s Relatives: The National Board of Revenue's (NBR's) Central Intelligence Cell (CIC) yesterday conducted a drive at "President Resort" in Kishoreganj, around 100km north of the capital. The drive was conducted as part of its investigation into several allegations against the owners, including occupation of land by force. Different documents, four hard disks, and 16 registers were seized while evidence from alleged victims was collected during the drive, assisted by police, the land office, and other state agencies. (The Daily Star)

3.

RMG Workers' Wage to Go Up 9.0% Annually: Workers in Bangladesh's main export-earning garment industry finally get a 9.0-percent annual wage hike from the existing 5.0 per cent, following waves of labour unrest. Garment workers will get the enhanced wages from January, Ministry of Labour and Employment (MoLE) adviser of the interim government M Sakhawat Hussain made the announcement at a press briefing after a meeting held at his secretariat office in Dhaka. The annual-increment hike comes to 4.0 per cent, as agreed at the tripartite meeting, amid labour unrest in the country's apparel sector. (The Financial Express)

4.

No IOC Bids for Exploration: Not a single international oil company (IOC) did come for bidding, finally, following open tendering by the state-run Petrobangla to attract foreign investment for bay hydrocarbon exploration, said sources. "We were surprised to see that not a single IOC did submit bids by the close of bid-submission deadline on Monday," Petrobangla chairman Zanendra Nath Sarker told the FE. Mr Sarker could not say the cause of the lack of interest from the IOCs in Bangladesh's offshore hydrocarbon resources. (The Financial Express)

5.

BB to Keep Policy Rates Unchanged as Panel Suggests Shift from Crawling Peg: A high-powered panel of the Bangladesh Bank (BB) decided to maintain the policy rate at 10 percent until the inflation comes down to a desired level and also spoke about moving away from the crawling peg and letting market forces determine the US dollar exchange rate. However, the meeting did not finalise anything about ditching the crawling peg right now, according to the meeting minutes of the Monetary Policy Committee (MPC). (The Daily Star)

6.

No Overnight Cure for Ailing Financial Sector: There is no overnight cure for the deep-rooted challenges facing the country's banking sector, Abdul Awal Mintoo, former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), said yesterday. He also said the initiatives that the Bangladesh Bank has taken so far are not enough to bring down non-performing loans. He made the remarks while speaking on the current business and investment environment and the way forward at the Economic Reporters' Forum (ERF) office in Dhaka. The ERF organised the conversation. (The Daily Star)

----Saju Sarker

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“This project will enable Bangladesh to catalyze private sector financing, reduce pressure on public finance to address infrastructure development deficits, and create more employment,” ADB Country Director for Bangladesh Hoe Yun Jeong said in a statement. “The loan will enhance the financial and institutional capacity of the Bangladesh Infrastructure Finance Fund Limited (BIFFL) to deliver its mandate of fostering an environment that supports sustainable private investments through the mobilization of PPP, with a strong focus on gender and climate change.”

Bangladesh is undergoing a transformative phase, driven by economic shifts and recent political transition. The country's infrastructure development, primarily driven by the public sector, faces challenges due to limited resources and implementation constraints.

A key hurdle in infrastructure investment is the shortage of long-term debt funding in the local market. The ADB loan aims to address this gap by providing long-term financing to BIFFL, facilitating the completion of critical infrastructure projects that will foster economic growth.

The Strengthening the Bangladesh Infrastructure Finance Fund Limited Project – Additional Financing will strengthen BIFFL’s capacity to crowd in private sector financing and facilitate new technologies brought by international sponsors and foreign direct investors. With ADB’s support, BIFFL will establish gender screening of subprojects and develop a gender equality and social inclusion strategy.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 69 members—49 from the region.

BBN/SSR/AD

The cut off yield, generally known as interest rate, on the 91-Day T-bills came down to 11.65 per cent on the day from 11.71 per cent earlier while the yield on 182-Day T-bills stayed at 11.90 per cent from earlier level.

However, the yield on 364-Day T-bills remained unchanged at 11.99 per cent on the day from the previous level, according to the auction results.

The government borrowed BDT 77 billion against the pre-auction target of BDT 80 billion through issuing three-type of T-bills to meet its budget deficit partly.

Currently, four T-bills are transacted through auction to adjust government borrowings from the banking system. The T-bills have 14-day, 91-day, 182-day and 364-day maturity periods.

The bills are short-term investment tools issued through auction, conducted by the central bank on behalf of the government.

Furthermore, five government bonds, with tenures of two, five, 10, 15 and 20 years respectively, are traded on the market.

BBN/SSR/AD

The news of record inflation and huge fines among market manipulators further triggered the prevailing investor pessimism, according to market operators.

Following the previous week's flat ending, the prime index of the Dhaka Stock Exchange (DSE), went down by 43 points or 0.82 per cent to 5,145 at 11:00 am when the report was filed.

The DS30 index, a group of 30 prominent companies, lost 16 points to 1,871, while the DSES index, which represents Shariah-based companies, shed 9 points to 1,155.

Turnover, another important indicator of the market, remained low and amounted to BDT 713 million till then.

Of the issues traded till then, 270 declined, 44 advanced, and 61 issues remained unchanged on the DSE trading floor till then.

Bangladesh Shipping Corporation was the most traded stock till then with shares worth BDT 42 million changing hands.

On the other hand, the Chittagong Stock Exchange saw a downward trend till then with its All Shares Price Index (CASPI)—losing 37 points to stand at 14,543, while the Selective Categories Index – CSCX fell 23 points to reach 8,848 till then.

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