10-year treasury bond yield reaches decade high

The yield of 10-year government bonds has increased to 12.05 percent, the highest in a decade, amidst tight liquidity in the market, indicating that money will turn expensive, said market insiders.

The government borrowed just over Tk 1,500 crore through auctions yesterday against bids offering Tk 2,000 crore, said a top official of a private bank.

The increase in the yield shows that there is a dearth of liquidity in the market, said a treasury chief of a private bank.

The interest rate of 10-year bonds rose in the footsteps of that of two other bonds -- one of a two-year maturity period and another of five years -- in auctions that took place in the past two weeks.

The government borrowed a total of nearly Tk 2,800 crore through the auctions of the two-year and five-year bonds, according to Bangladesh Bank data.

In January, yield of the 10-year bond was 11.90 percent, up from 10.46 percent in the previous month.

The yields of treasury bills and bonds have been rising gradually since March 2022 as Bangladesh Bank has been gradually tightening money supply in order to bring down inflation, which has been prevailing at over 9 percent since March last year.

This month the interest rate of 364-day treasury bills (T-bills) rose to 11.6 percent, the highest in over a decade, as the government continued to borrow against the backdrop of revenue collection staying less than that required for public expenditure.

Tax collected by the National Board of Revenue (NBR) in the July-December period of the current fiscal year was over Tk 23,200 crore short of the target.

However, the Tk 165,630 crore collected in the first six months was in its totality a year-on-year rise of 14 percent.

There is government demand for liquidity since revenue collection was lower than that required, said SM Galibur Rahman, head of research & strategic planning at Shanta Securities.

As such, overall, interest rates will increase, he said.

"Money will flow to the place where the return is higher," said Rahman, adding that ultimately individual and corporate deposits are likely to be invested in treasury bills and bonds.

This will squeeze loanable funds at banks. As such, banks will have to hike the interest rates for both deposits and lending, he added.

"Going forward, it will be difficult for borrowers, especially those who have taken up projects based on the lower rate of interest of the recent past. More funds will flow to treasury bills and bonds. But depositors will get higher returns," he said.

In a publication on economic outlook for the first half of 2024, CAL Investment projected the yield of 364-day treasury bills to reach 13 percent to 14 percent by June this year.

This will result from the continuation of monetary policy tightening, with an expected policy rate hike of 50-75 basis points, said the investment bank.

"The potential increase in interest rates may constrain private sector credit growth, amplifying the risk of non-performing loans accumulating in the banking sector," said the report released in January.

CAL Investment projected that the interest rate on lending by banks will rise to 15.7 percent by June this year. "Companies need to prepare for higher borrowing rates," it said.