First Treasury bonds go on auction
The government is eying K200 billion in its first bond auction to fund the state deficit as it aims to reduce lending from the Central Bank.
THE government will hold the country’s first-ever Treasury bond auction today as it seeks to start covering more of its budget deficit by selling debt to local investors.
Myanmar governments have sold Treasury bonds in the past to private and state-owned banks in two-, three- and five-year maturities. But never before has the administration allowed the market to determine the interest rate at which it borrows – instead it covered much of the deficit by issuing debt at artificially low rates to the Central Bank.
Today’s sale – the first of what will be monthly debt auctions of bonds and bills – will see commercial banks bid for K200 billion (US$162 million) of government bonds. Private and state-owned bank bids will determine the yield on the bonds, and they have the option to buy a collective total of K120 billion.
The other K80 billion is set aside for Myanmar Economic Bank (MEB), but that lender can only purchase bonds at the same yield, said U Maung Maung Win, deputy minister at the Ministry of Planning and Finance. MEB is the country’s largest state-owned bank, and has a mandate to lend at subsidised rates to other state banks, cooperatives and state-owned enterprises.
“MEB has lots of liquidity,” said U Thatha Hla, an economist with the Asian Development Bank (ADB), which provides technical assistance to the government on debt management. Because that lender has so much spare cash to put to work, if MEB was allowed to compete in the auction then the volume of its bids would push down the final yield.
This in turn would make the bonds less attractive to other commercial banks, the main investor base for government debt. Commercial banks have few investment options for excess cash, which high inflation erodes if left unused.
Bankers told The Myanmar Times last month that a traditional monsoon season slowdown in lending meant there should be plenty of demand for Treasury bonds. U Maung Maung Win said that based on a recent meeting with commercial banks, he also expected robust appetite.
Auctions at market rates should help commercial banks put more excess liquidity to work, while reducing the pressure on the Central Bank to print money in order to help cover the deficit. The government expects a K3.76 trillion deficit this financial year, and hopes to cover K1.85 trillion of it through Treasury bonds and shorterdated Treasury bills.
Central Bank borrowing is expected to provide another K1.24 trillion, but the government aims to rely more and more on Treasury debt in coming years.
Individuals and companies can also purchase Treasury bonds, but U Maung Maung Win said there were comparatively few such investors. Firms and individuals have to go through MEB or the Myanmar Securities Exchange Centre (MSEC). An official at the MSEC said that the centre was not ready to offer Treasury bond purchases in today’s auction, but would be ready for the October sale. She expected reasonable interest among firms and individuals, particularly insurance companies, which were regular buyers in previous auctions.
“Most of the individual investors are ones with lots of experience buying Treasury bonds,” she said. “Company investors are mostly insurance firms. In previous sales they mostly wanted three bonds over the two- or five-year issues.”
Today’s auction is for new paper in an existing Treasury bond issue that matures in May 2018. This means that the new bonds sold today will have a short and slightly unusual maturity of roughly one year and eight months. The government recently sold a K1 billion one-year Treasury bill with an interest rate of 8.5pc.
U Maung Maung Win said the government is trying to increase older, smaller Treasury issues to create “benchmark” bonds, which are typically large deals issued at market rates that can be used by investors as pricing reference points for future deals.
The greater the volume of bonds in any one Treasury issue, the easier it should be for investors to trade this debt in the second market. In turn, the more paper that is traded in the secondary market, the clearer the appropriate market price for new Treasury bonds should be.
The ADB and International Monetary Fund have both highlighted the need for a wider range of Treasury bond issues and a strong secondary market in government debt.
U Maung Maung Win said that next month’s auction would likely be for a similar maturity in an existing deal, but the government still plans to issue longer-dated bonds in coming months. “We’re considering three- and five-year bonds,” he said. Auctions in these maturities could begin before the end of this financial year, he added.
The government is hoping to sell around K1 trillion ($841 million) in government debt during its first financial year, but this target can change based on investor interest, U Maung Maung Win said previously.
‘Most of the individual investors are ones with lots of experience buying Treasury bonds.’
Administration official Securities Exchange Centre
Pedestrians walk past the Central Bank of Myanmar building in Yangon.