First Trea­sury bonds go on auc­tion

The Myanmar Times - - Front Page - STEVE GILMORE s.gilmore@mm­times.com

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

Photo: Naing Wynn Htoon

Pedes­tri­ans walk past the Cen­tral Bank of Myan­mar build­ing in Yan­gon.

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