Treasury bill, bond yields drop further amid surplus bank funds

The interest rates on treasury bills and bonds have continued to fall as the liquidity in banks outstripped government borrowing needs.

According to Bangladesh Bank data, treasury bill and bond interest rates have dropped by 107 to 181 basis points over the past month. The decline was comparatively smaller in January, with rates falling by 10 to 29 basis points from December.

Treasury bills are short-term financial instruments issued by the government, typically maturing within 91 to 364 days. They are considered a safe and low-risk investment since they guarantee interest payments.

Treasury bonds, in contrast, are long-term financial instruments also issued by the government, with maturities ranging from 2 to 20 years.

Bangladesh Bank data shows that in the auction held on Feb 17, the interest rate on 91-day treasury bills stood at 10.35 percent, down from 11.42 percent in January.

Likewise, the interest rate on 180-day treasury bills dropped to 10.24 percent, compared with 11.42 percent a month earlier.

For 364-day treasury bills, the rate fell by 160 basis points to 10.35 in February.

The downward trend also affected treasury bonds. The interest rate on two-year bonds stood at 10.98 percent in February, compared with 12.18 percent in the previous month.

The rate for five-year bonds stood at 10.47 percent in February, down from 12.10 percent in January.

For 10-year bonds, the rate fell from 12.08 percent to 10.27 percent in February.

No auctions were held for 15-year and 20-year bonds in February, according to Bangladesh Bank. However, a senior central bank official said that if auctions were to be conducted in the remaining days of the month, interest rates for these bonds would likely decrease as well.

Since July 2023, interest rates on treasury bills and bonds had been on the rise, attracting increased investments from banks and financial institutions due to their high returns and security.

At an event organised by the Economic Reporters Forum on Feb 20, Bangladesh Bank Governor Ahsan H Mansur addressed the issue and said, “Interest rates on treasury bills and bonds are decreasing. Banks have been making easy profits by investing in these instruments. However, this opportunity will no longer be available in the future. Banks will have to rely on deposit investments to conduct business.”

A senior Bangladesh Bank official attributed the decline in treasury bill and bond rates to an oversupply of funds relative to the government’s demand.

Meanwhile, private sector loan growth has slowed significantly, reaching 7.28 percent at the end of December -- the lowest in a decade.

The last time private sector loan growth was this low was in May 2021, during the COVID-19 pandemic, when it stood at 7.55 percent.

“Treasury bill and bond interest rates were relatively high, which led banks and financial institutions to invest heavily in them," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

"As a result, the supply of funds exceeded demand. This increase in liquidity has prompted the government to lower rates.”