In a strategic move aimed at invigorating Bangladesh’s secondary bond market, the central bank has introduced a new set of regulations that narrow the spread on two-way price quotations for primary dealer (PD) banks.

Officials from the Bangladesh Bank (BB) announced on Thursday that the spread, previously set at 1.20 percent (or 120 basis points), has now been reduced to 0.80 percent (or 80 basis points) across all tenors of government securities (G-Sec).

According to a notification from the central bank, this adjustment will now be determined based on the bid-ask yield rather than the price. The modification is part of a broader effort to promote greater trading activity and overall liquidity in the secondary market for government securities.

A senior BB official, commenting on the measure’s significance, said, “The new rules will help develop the bond market through boosting trading of the G-Sec in the secondary market.”

To further support this initiative, the central bank has identified 30 bonds from a pool of 250 government-approved securities as benchmark instruments. These benchmark securities have been chosen to facilitate more structured and predictable trading, with the expectation that this will provide a clearer foundation for pricing and investment decisions in the bond market.

The updated regulations require PD banks to submit two-way price quotes directly to the central bank system. This step aims to ensure greater price transparency and standardization, which is crucial for improving investor confidence in the market.

According to a senior official at a major PD bank, the introduction of higher-yield securities as part of the new benchmarks is anticipated to attract more savers and investors. The official stated, “Higher yield securities have been included in the latest benchmark, which will help attract savers to invest their funds in the G-Sec through the secondary market.”

Market observers and stakeholders are optimistic about the impact of these changes. The revised spread mechanism is expected to facilitate more efficient price discovery and enhance the overall attractiveness of government securities as an investment vehicle. This could, in turn, spur greater secondary market participation, thereby addressing some of the longstanding liquidity challenges that have hindered the growth of Bangladesh’s bond market.

Primary dealers play a crucial role in the country’s financial system, acting as intermediaries between the government and investors in both primary and secondary markets for government securities. Currently, 24 designated PDs have been tasked with managing the government’s debt securities and ensuring an active secondary market.

The Bangladesh Bank has extended several privileges to these PDs to encourage their market activities. For instance, PDs are eligible for liquidity support from the central bank. Such support, which can be collateralized with Treasury bills and government securities, is made available through the repo mechanism or other arrangements the central bank prescribes.