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Mr. NewYork's stand

26 July 2005, 18:00 PM
LETTERS TO THE EDITOR
By Naureen Khan Banani, Dhaka
26 July 2005, 18:00 PM
Dear Mr. NewYork, thank you for the abridged finance review on the yield curve, however your response is at best dull and inaccurate in the Bangladesh financial market context, or in fact in any financial market context. Firstly, it is absolutely inaccurate to mention that the yield curve is purely based on investor expectation and not on government action. Even finance folks in the States, in financial city centres in New York would move out of the "financial theory" mind box and acknowledge that the Fed policy & treasury actions very much affect the yield curve, especially the spot rate curve.

Fed directly affects the Fed rate and then it has some ripple effect on the rest of the yield curve. So similarly in Bangladesh, the treasury action greatly affects the yield curve. Probably where Mr. Byron' article was lacking was that it did not specify what type of yield curve it was. Given

that a secondary bond market is non-existent, it is safe to assume he was talking about some treasury spot rate curve.

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Mr. New York, if you might also not be aware that in the Bangladesh Bond market most commercial banks base their rate sheet off the Bangladesh Bank rate lists. Given that there is no secondary market, these institutional investors are not really forming forward looking "expectations about the economy" but rather acting as agents of the central bank, in adopting the rate sheet.

Therefore, Mr. Byron is absolutely right in assuming that rates of all maturities, depicted in the yield curve, are influenced by the central bank's actions.