The increasing interest among banks in purchasing treasury bills and bonds—essential tools for short-term and long-term government borrowing—has led to a decline in their interest rates by 10 to 29 basis points.
According to data from Bangladesh Bank, on Tuesday, bonds with a five-year maturity worth 40 billion BDT were auctioned. Banks offered nearly 180 billion BDT at various interest rates in response. Ultimately, these bonds were sold at an interest rate of 12.09%.
In the previous auction, the government had to pay an interest rate of 12.38% for the same bonds, marking a 29-basis-point decrease in the rate for five-year bonds.
Additionally, the central bank reported that on Monday, the government raised funds through treasury bills: 35 billion BDT via a 91-day bill at an 11.34% interest rate, 20 billion BDT via a 182-day bill at 11.68%, and another 20 billion BDT via a 364-day bill at 11.81%.
For comparison, in the auction held on January 6, the interest rates for these bills were 11.43%, 11.80%, and 11.95%, respectively. This shows a maximum reduction of 14 basis points in treasury bill interest rates over the span of a week.
A senior official from the central bank, speaking anonymously, explained that liquidity in well-performing banks has grown significantly in recent months due to increased deposit growth and reduced loan demand.
He also mentioned that in November last year, the central bank injected liquidity support worth 225 billion BDT into six banks by printing money to address liquidity shortages. This intervention increased the overall cash supply in the market, prompting banks to turn to treasury bills and bonds as a safe investment option.
Another central bank official highlighted that the government’s dependency on borrowing from the banking sector is decreasing. He explained that as of December 31, banks needed to close their accounts for the fiscal year. During this time, they retained liquidity to maintain healthy financial statements. Now, with an excess of liquidity and limited loan demand, banks are increasingly investing in treasury bills and bonds.
The official further noted that if interest rates had remained unchanged, it would have been possible to sell an additional 100 billion BDT worth of bonds.
Bank officials also remarked that while banks currently charge 12–14% interest on loans, the demand for credit has fallen significantly. Moreover, banks are now more cautious in their lending practices compared to the past.
They pointed out that lending requires banks to maintain a specific Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) with the central bank. Additionally, there is always the risk of non-recovery of loans, making lending a less attractive option.
In contrast, investing in government treasury bills and bonds offers several advantages. Firstly, the government guarantees these instruments, eliminating the risk of funds getting blocked. Secondly, the interest rates on these bills and bonds are comparable to loan rates. Lastly, banks are not required to maintain CRR or SLR for investments in treasury bills and bonds.
Syed Mahbubur Rahman, Managing Director and CEO of Mutual Trust Bank, noted that banks are now anticipating a potential decline in loan demand due to reduced government expenditure. Consequently, interest rates on treasury bills and bonds may decrease further in the coming days. To optimize their liquidity, banks are locking in their surplus funds, given the low demand for credit and limited alternative investment opportunities.
He also stated that if inflation decreases in the future, the interest rates on treasury bills and bonds are expected to decline further, making them even more attractive as investment options.
