91-day treasury bill yield hits record 12.10% 

The yield on the 91-day treasury bills surged to an all-time high of 12.10% in the latest auction held at the Bangladesh Bank, as commercial banks adopt a cautious stance in managing liquidity amid mounting financial stress.

According to the central bank, the rate on Monday's auction rose by 8 basis points in just two weeks. In the previous auction held on 2 June, the rate stood at 12.02%. 

Compared to May, the increase is even more significant, up by 45 basis points.

At the auction, interest rates for longer-term treasury bills also climbed. The 182-day treasury bill rate rose by 60 basis points over the past month to 12.11%, while the 367-day bill rate jumped by 62 basis points during the same period.

Experts within the sector say the surge is largely driven by concerns over tightening liquidity conditions and the looming suspension of central bank liquidity support mechanisms like the 14-day repurchase agreement (repo) and Assured Liquidity Support (ALS), speculated to be discontinued from July.

In late February, the central bank, during a meeting with its policymakers and heads of treasury departments from both state-owned and private banks, had already announced that it would gradually phase out 14-day and 28-day repo lending facilities. The 28-day repo has already been discontinued.

A repurchase agreement is a form of short-term borrowing, mainly in government securities. Banks sell underlying securities to the central bank and, by agreement between the two parties, buy them back shortly afterwards, usually the following day, at a slightly higher price.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told The Business Standard, "Many banks in the country are facing liquidity stress due to a rise in non-performing loans. On top of that, depositors are withdrawing funds from weaker banks and moving them to stronger ones. As a result, while stronger banks are managing their liquidity, the weaker ones are struggling."

"This is also leading to a decline in the number of banks participating in government treasury bill and bond auctions," he added.

He noted that if the central bank indeed discontinues 14-day repo borrowing in July, liquidity management would become even more challenging for many banks.

According to several senior bank officials, banks typically maintain a portion of their liquidity with the central bank to meet the Cash Reserve Ratio (CRR) requirement. A significant portion of this liquidity is managed through borrowing via repos of various tenures, depending on maturity.

Losing access to the 14-day repo would force banks to rely more heavily on deposit-based liquidity, making short-term cash management more difficult. As a result, banks are adopting a more cautious approach when it comes to purchasing government treasury bills and bonds, they said.

A deputy managing director of a private bank said the liquidity facilities previously available from the central bank are gradually being reduced.

"If this trend continues, the interest rates on treasury bills and bonds will rise further in the coming days," he said, adding that this will also lead to a steady increase in the government's interest payment burden.

A managing director of a leading private bank cautioned against suspending 14-day repo facilities at this time, noting the sector's current fragility.

"Reducing liquidity support during such a time could further worsen the crisis in the banking sector," he said. 

"Of course, the central bank has the authority to withdraw the 14-day repo facility if deemed necessary, but it must carefully consider whether now is the right time to do so," the official added.

He further advised the government to focus more on short-term borrowing.

"Given the current high interest rate environment, the government should avoid long-term borrowings like 15- and 20-year bonds. Instead, short-term borrowing would reduce the long-term burden of high-interest payments," he added.