Interest on 10-yr Treasury bonds falls below 10% as lending from banks wanes

The yield on 10-year Treasury bonds dropped by 246 basis points over the past three months, falling below 10% for the first time in two years.

In a recent auction held on Wednesday, the interest rate on 10-year Treasury bonds stood at 9.89%, a sharp decline from the 12.35% recorded just three months ago. 

According to data from the Bangladesh Bank, more than Tk2,000 crore in Treasury bonds were sold during the auction on Wednesday.

The central bank has been keeping its key policy rate unchanged at 10%, aiming to contain the inflation rate.

Bankers and central bank officials attribute the decline to three main factors: excess liquidity in the banking sector, foreign currency purchases by Bangladesh Bank through auctions, and a reduced need for government borrowing via Treasury bills and bonds.

Mohammad Ali, managing director of Rupali Bank, explained, "New investments are low, which means businesses are borrowing less from banks. As a result, liquidity in the banking sector has risen. Bangladesh Bank's purchase of dollars through auctions has further boosted liquidity, while the government has reduced borrowing through Treasury bonds."

Several managing directors of private banks told TBS that yields on other Treasury bills and bonds are also likely to decline in the coming months.

A senior Bangladesh Bank official, speaking on condition of anonymity, said, "Loan demand has fallen sharply, leaving many well-performing banks with excess liquidity. Since lending opportunities are limited, banks are investing more in Treasury bills and bonds."

Senior officials from several banks confirmed that they are now lending at rates between 12% and 14%, but loan demand has fallen significantly and banks are being more cautious in their lending practices.

A private bank's Treasury head noted that investing in government Treasury bills and bonds is a much safer option for banks. 

He explained, "Firstly, the government guarantees the bonds, ensuring the funds are secure. Secondly, the interest rates on these bills and bonds are close to those on loans. 

"Finally, banks are not required to maintain a Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) against these investments."