Bangladesh Bank bond auction data explained

Treasury bonds are instruments that the government issues to borrow. It is basically a debt to the government. It is being issued by the government while the auction is being conducted by Bangladesh Bank. Short term instruments (less than 1 year tenure) are called Treasury bills, and long-term instruments are called bonds (tenure more than a year).

Bangladesh government issues bills of three maturities- 91 days, 182 days and 364 days. The auction for 91 days is held weekly, while for the other two, it is usually bi-weekly (depending on the government’s borrowing needs).

Bonds are for 2 years, 3 years, 5 years, 10 years, 15 years, and 20 years. Apart from the 3-year T-bond, the rest are all usually auctioned once a month.

The yield received on treasury instruments are usually called treasury rates. Anyone who invests in treasury bonds receives a particular rate of return. This is the yield of the bond. Suppose you hold a bond that has a yield of 7%. This means that your return from investing in this bond is going to be 7% (considering that you hold this bond till maturity).

There are two ways you get this return.

The first is through coupon payments. This is the fixed interest you will receive on a fixed time period basis (for Bangladesh Bank treasury bonds it is half-yearly) on the bond. The holder of the bond will therefore be receiving the interest amount on the bond.

Note: Bills are zero-coupon instruments. This means bills do not receive any coupon payments.

The second way is through the discrepancy between the price you bought the bond for and the face value of the bond. Face value is also known as par value. The price at which you are buying the bond for is known as the sale value.

The face value of the bond is the amount you will be receiving back from the government on the date of maturity. So, suppose, the face value of the 91-day T-bill you purchased is BDT100. You bought it for BDT90. When you are purchasing the bond, you will be giving the government BDT90. At the end of the 91-day period, the government will be giving you back BDT100. The difference between them, aka BDT10, is your return.

Note: Since bills do not have coupon payments, the yield is represented by the difference in the face vs sale value.

Note: Bonds have coupon payments, therefore, the yield is calculated with both the coupon rate and the price return amount. [The calculation process is too complicated for now, we will discuss it in later writeups]

If you buy a bond at its face value, you are purchasing it at par value. If you buy is at a price lower than its face value, you are buying it at a discount, and if you are buying it at a price above, you are buying it at a premium.

Treasury rates are risk free rates

Treasury rates represent the risk-free rate of interest and affect the cost of borrowing for the country (for individuals and corporates). This in turn affects borrowing and spending appetites, which in turn affects production and the economic cycle.

Treasury instruments are basically risk free because the government is the one issuing and backing them up. The only time they won’t be paid back is if the government defaults on a domestic level, which is unlikely to happen (because the government can always ask the central bank to print money to pay back treasury bill/bondholders).

It is the safest instrument in a country in that sense. It is the amount that investors are willing to accept for zero risk, that is, it is the price of money.

What is the process?

When treasury bonds are being issued, this is a primary sale, aka it is being sold in the primary market. The buyer is buying the bond, and giving money to the government, who is the original issuer of the bond.

When a party already holds a bond and sells it to someone else, it is being sold on the secondary market. The government receives no money from the sale of the bond. The dealing is between the two parties (buyer and seller)

Let’s focus now on the primary market.

Treasury bonds are sold through auctions. Usually, only banks and FI’s participated in the auction. General investors could purchase it as well but would have to do it through a bank (recently changed).

So, to simplify things, let's just assume financial institutions are the ones who are buying. And obviously, the seller is the issuer (the government). Bangladesh Bank is conducting the auction. It is not the one who is selling the bond; it is not the one who is borrowing the money.

How does the auction work?

As with all auctions, the buyer will place bids. The seller will decide which bids it wants to accept.

This is best illustrated with an example.

Let us say Bangladesh Bank is holding an auction for BDT1000 of 5-year bonds. (The amount that will be auctioned is based on the government’s needs during that period and borrowing appetite). For simplicity’s sake, let us assume that the coupon rate is zero (it is a zero-coupon bond). BDT1000 is the face value of the bond.

6 banks placed their bids for the bond. This is shown as the amount they are willing to lend out to the government; this represents the amount of treasury bonds they are willing to purchase, and the yield at which they are willing to buy it for.

Note: For clarification, the amount bid is based on the face value of the bank. Bank A bid for BDT100 taka worth of the bond means that at the end of the 5-year period, it will receive BDT100.

So, from here, we get a few key data points.

1. Number of bids received: 6 (6 banks placed bids)

2. Range of bids received: 5%-10%

a. Lowest yield bid: 5%

b. Highest yield bid: 10%

3. Total face value bid for: BDT 2350

1 to 3 are the data we find in the bids received section of the treasury auctions data published by the Bangladesh Bank.

Note: Bank-wise/individual bid data is not released. Aggregate data is published.

The next step is that the central bank will accept some bids and reject some of the other bids. This decision can depend on several factors, for example, i) the rate of the bids (I.e., price the banks are asking for), ii) borrowing need of the government (how much does the government need funds and are there any alternatives?).

Let’s go back to the previous example, with 6 banks placing their bids. The central bank (BB) has decided to reject bids above 7% and accept those below it. This means that BB accepts bank C, E and F’s bids, and rejects A, B and Ds. It ends up borrowing a total of 1000 (400+50+650) total from 3 banks (accepted 3 bids) in the range of 5%-7%.

From here, we get a few key data points.

1. Number of bids that the central bank accepted (3 in this case)

2. Range of bids accepted

3. Cut off yield (maximum yield accept, in our example it is 7.00%)

4. Total amount of bonds SOLD by the central bank

5. FACE Value of the bonds SOLD (total)

The first 3 are quite self-explanatory, so let’s focus on the 4 and 5.

As we have already discussed above, the ‘face value’ of the bond is the amount the government will return at maturity of the bond (or bill). The total face value item in this case would therefore be the total amount the government would have to pay back to the 3 banks at maturity whose bids were accepted (so 1580).

However, that is not the amount that the government receives. The amount the government will receive is based on the ‘yield,’ or the rate. Assuming no coupon payments in this example, this means the face value will have to be discounted by the yield, to find the present value.

Why is this the case?

Let’s flip the perspective around to understand it better. Suppose you are Bank C. Your bid for BDT400 worth of the bond at a yield of 6% has been accepted. This means the bond you just purchased will give you 6% return p.a. There are two ways this can be done i) through coupons ii) through price vs. face value of the bond. Given that this is a zero-coupon bond, the only way is through the second one. So, you will buy the bond at a cheaper price, and at the end of the bond maturity, you will be returned the face value of the bond. This discrepancy between the two is your return.

In this case, BDT400 will be discounted for 5 years by 6%, and we get BDT299. Bank C will therefore purchase the bond for BDT299 and at the end of the 5-year period, will receive BDT400. This means that the government will receive BDT299 from bank C.

Note: Bangladesh Treasury Bonds have coupon payments every half yearly. This example is not indicative of the actual 5-yr T-bond. When a coupon payment is being paid, the return is derived from the coupon payment AND the price discrepancy. So, the price discrepancy would be much lower.

Lastly, we have an item that is the weighted average price of the bids accepted. What this looks at is how much did the banks pay, on average (remember each bank received the rate it bid for, as long as it is at or below the cut-off yield) to purchase a bond with a face value of BDT100. This can be summarized as the sale value, over the face value, converted to a 100.

I will end the post here with the basics explained, and will delve into some metrics, calculations, and figures that we study in the next blog post. Till then, if you do have any concerns, please, please, please, do not come to me. ^^ (I kid, drop a message please)