Bond industry participants are requested to fasten their seat belts as the market is about to take off in the presence of Bond Automated Trading System recently launched at the Karachi stock Exchange, where following the successful commencement of online TFC trading in November, National Saving Organization is now exploring secondary market by issuing National Saving Bond (NSB).
As NSB can easily be sold before maturity, it will probably surpass other previously issued fixed income securities with similar characteristics, mainly National Saving Certificate, since market price setting mechanism will increase investors exposure to capital gains, with the market expecting interest rates to reduce further in the medium term.
But overall success of NSB is contingent upon its market size, as healthier the market size, higher will be the volume of trading, that will lead to better price discovery. It will also likely steal small saving account depositors from commercial banks, as investment in NSB can be made with a minimum amount of Rs20,000 and offers attractive returns to wide array of investors, such as individuals, mutual funds, provident, pension, gratuity funds or trust funds.
Furthermore, it will satiate the governments financing needs through non-banking channel to meet the yawning gap between its revenue and expenditures. Likewise, the cost of raising fund will also decrease due to availability of liquidity.
Mutual fund industry officials also seem to have an optimistic view of this development as it will provide them additional investment avenue, while providing tax efficiency to mutual fund holders, who will indirectly invest in this security.
In short, developed debt market will promote saving culture and would also pave the way for the development of corporate bond market, derivatives products and mutual fund industry.
So far, the size of Pakistans bond market is meager compared to other avenues, equity and banking sector. This can be gauged from the fact that public bond market as a percentage of GDP stood at 27 percent in 2007, as against bank deposits and stock market capitalization, which were 34.8 percent and 40 percent of GDP respectively, according to CEIC.
But the launch of NSB will likely expand the bond market, which is inevitable in the long run because wide fluctuations in stock market during the past decade have increased investors appetite for fixed income securities.