Finally the long-held objective of listing of government securities on the local bourses has taken some steps forward. According to news reports, the operational process will set-off from January 31.
Market participants have a diverse set of opinions on the development. Some assume that the government is planning to borrow more in the coming times and hence looking forward to broaden the investor-base. Others guess that the government wants to reduce its reliance on the financial system in order for them to facilitate the private sector.
Regardless of the underlying motivation, the listing of risk-free securities on the KSE (expectedly followed by LSE and ISE) appears to be the best step forward which will not only broaden the horizons of government borrowings to include domestic retail investor community most of which is currently unaware of this risk-free avenue but will also entice foreign portfolio investments in fixed-income securities which is currently only concentrated in equity.
Besides, diversified investors will result in better price discovery mechanism of the government securities. It is also likely to trigger the development of KSEs bond automated trading system (BATS) which is currently in its nascent phase as the listed TFCs are not actively traded.
While most market participants hail the idea of listing of government securities, a little dissent was found whereby some analysts believe that government securities will gulp the share of retail investments from the equity market. However, that may not be necessarily so.
First, equity investors have an entirely different risk-profile than fixed-income investors. So there is no motivation for a typical equity investor to drift towards low-yielding government papers just because they are risk-free. Although it might draw attention of the risk-averse investors who desire to benefit more from dividend-yields than price fluctuations but such investors represent a small portion of the equity market and those also turn towards mutual funds to maximize their returns.
Secondly, the broker commission is very nominal in case of fixed-income securities and hence they don push such products forward. Initially, the government securities are expected to meet the same fate. Nevertheless, the risk-free fixed-income securities bear an enormous attraction for the small retail investors which can be gauged by the tremendous growth achieved by National Saving Schemes (NSS) despite having no secondary market. The process of government securities gaining traction might be slow but it will surely make a success story.
It will not only reduce the reliance on authorised primary dealers but will also create a level playing field for bank and non-banking participants to reap the avenue. While it will not affect the equity investments, it will certainly bring-in more investors which will add depth to the secondary market and will be an important milestone in the establishment of bond market in the country.
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