All Treasury bill yields fall below 10% amid rising liquidity

Interest rates on all tenures of Treasury bills in Bangladesh have dropped into single digits, reflecting increased liquidity in the banking sector and reduced government borrowing requirements.

According to Bangladesh Bank data, yields on Treasury bills have declined by 211 to 233 basis points over the past three months. At yesterday's auction, the 91-day, 182-day and 364-day Treasury bills recorded yields of 9.90%, 9.78% and 9.68% respectively – down from around 12% in July.

Treasury bills are short-term government securities, typically with a tenure of one year or less, considered safe and low-risk investments due to their sovereign backing. While individuals and institutions can purchase them, in recent years, commercial banks have been the dominant buyers, deploying surplus liquidity in these instruments.

Infograph: TBS

Since mid-2023, Treasury bill and bond yields had been on an upward trajectory, crossing 10% in November of that year. However, yields have now reversed. Long-term Treasury bonds have also followed the same trend, with yields on the 10-year, 15-year and 20-year bonds standing at 9.88%, 9.66% and 9.69% respectively this month.

Bankers, economists and central bank officials attribute the decline in yields to two primary factors. Firstly, the Bangladesh Bank has purchased $1.88 billion from commercial banks since July, injecting around Tk23,000 crore into the market and boosting liquidity. Secondly, the government has scaled back its borrowing through Treasury bills and bonds, reducing demand and therefore interest rates.

Md Touhidul Alam Khan, managing director and CEO of NRBC Bank, told TBS, "The decrease in Treasury bill yields, which have fallen below 10%, is primarily attributed to the Bangladesh Bank's intervention in the financial markets."

He added that market conditions – including subdued private sector credit growth (registering at around 6.5% in July) and steady remittance inflows – are contributing to the drop. 

Zahid Hussain, former lead economist at the World Bank's Dhaka office, echoed this view, noting that dollar purchases through auctions have expanded the money supply in the market, leading to lower Treasury yields.

Private sector credit growth remains weak at 6.52% in July, prompting banks to channel excess funds into government securities, which offer guaranteed returns.

Impact on lending and deposit rates

Senior bank officials and economists anticipate that the drop in T-Bill and T-Bond rates will eventually impact bank deposit and lending rates.

Currently, top-tier commercial banks are offering deposit rates between 8% and 9%, with others offering rates below 7%. As the cost of safe government borrowing declines, bankers expect banks to subsequently lower the interest rates offered on deposit accounts.

Regarding lending rates, currently averaging above 13%, experts believe a reduction hinges on the central bank's policy rate.

Touhidul Alam Khan said, "The decline in Treasury bill interest rates has prompted commercial banks to reduce the interest rates offered on deposit accounts. Consequently, this downward trend is expected to influence lending rates, leading to a decrease in the cost of borrowing."

However, the BB currently maintains its policy rate at 10%. If this rate remains unchanged, while deposit rates fall, economists warn that the bank spread (the difference between lending and deposit rates) could widen. Bankers believe that a cut in the policy rate would be necessary to reduce lending rates and facilitate cheaper credit access, potentially boosting new investment and overall loan volume.

Zahid Hussain cautioned that while lower lending rates may increase borrowing, it may not necessarily spur new investment, given the current weak investment climate.