Ever wonder about the situation of bond in the context of Nepal? Here we have everything you need to know about bonds.

Basically, we don’t. And the government of Nepal still manages to raise billions of rupees through long-term bonds. And, cheaply!

It should bother you when I say we don’t have a bond market in Nepal. You’ve surely heard of the government issuing bonds. Perhaps you’ve even invested in some. So, what is it that I’m trying to suggest when I say there is no bond market in Nepal? Well, the ‘bond market’ here is only a misnomer. Government bonds don’t have an active market and corporate (read ‘Bank’) debentures are listed in the stock market, but, they are insignificant in volume and are rarely traded. I’ll be focusing on the more sizable government bond segment. Let me explain further by first asking you a question.

Where can I buy government bonds in Nepal?

You cannot buy them at a stock broker’s. While it is common to buy bonds in the primary market – when the government originally issues bonds – we don’t essentially have a ‘market’ for bond trades. And, therefore, bonds do not get a price that is different from the face value. It is quite an interesting scenario as government bonds of almost all countries are actively traded and have market prices. In fact, the global bond market is three times the size of the equity market. On the other hand, bonds in Nepal are neither talked about nor sought after and therefore they are many times less in volume compared to the market capitalization of the stock market.

High demand for low-priced bonds

The government of Nepal issues two kinds of bonds – citizen savings bonds, and development bonds.

Development bonds are generic bonds that are issued frequently by the government to raise domestic debt. These are ‘bid’ bonds wherein buyers bid coupon rates. Buyers will be allotted based on lowest average bid coupon. These bonds are rarely traded.

These ‘bid’ bonds are almost always oversubscribed because of high demand. Why would low coupon bonds have high demand? Basically, because these bonds are entirely bought by banks looking to either meet their statutory liquidity requirements or invest in one the very few avenues available. The regulatory requirement that banks can lend only eighty percent of their funds has resulted in banks investing most of the remaining twenty percent in such bonds. This has guaranteed bond subscription for the government at a low cost. The result: Nepal's government domestic borrowing costs are lower than that of India, Russia, Brazil, Sri Lanka etc. And this is not on grounds of credit worthiness, but because of some regulatory tweaks.

Bonds for the public

Out of more than two hundred billion in long-term domestic debt raised by the government, around ten billion are ‘citizens savings bonds’ that be purchased by only Nepali citizens. These bonds have fixed pre-determined coupons (last issued at 8.5%) and are issued less frequently and only to ensure public participation in government bonds. Interestingly, with no market for bonds, the government has guaranteed ‘liquidity’ of these bonds through ‘market makers’ in the form of certain banks who have license to buy and sell these bonds. You can sell anytime to such banks who are obliged to purchase at face value. Buying would depend on availability, which is a factor of market price. Lower the market fixed deposit rates, lower the availability of such bonds through market makers and vice versa. The high fixed deposit rates in the last few months have resulted in many bondholders selling to the market makers.

Therefore, the majority of Nepali bonds are not liquid in essence, yet qualify for banks’ liquidity requirements and help the government raise cheap long-term funds. That a huge chunk of these funds lie unused in the Central Bank’s coffers is another matter. It is also high time regulators, including the Securities Exchange Board and the Central Bank take appropriate actions to boost the bond market in Nepal. For that investor awareness could be a start.