Treasury bond yields climb to 15-year high
The interest rate of treasury bonds recently jumped to a 15-year high of 12.75 percent, indicating that government borrowing will become costlier in the months ahead.
The previous highest yield of government bonds was an average of 13 percent in 2009.
For all latest news, follow The Daily Star's Google News channel. The development comes following a hike in the interest rate of treasury bills, which have risen to a record 12 percent as the government increased its borrowing from internal sources to meet the budget deficit.
Besides, deposit and lending rates at banks also started increasing after the Bangladesh Bank scrapped the Six-months Moving Average Rate of Treasury bills (SMART) formula to make interest rates fully market-based.
The central bank left the fixed interest and foreign exchange rate regime in favour of a market-based system as per the conditions for a $4.7 billion loan from the International Monetary Fund (IMF).
As such, the SMART formula, which was in place since July 2023, was officially removed on May 8.
The banking regulator also increased the policy rate by 50 basis points to 8.5 percent to make money costlier and tame the high inflationary pressure.
These initiatives have raised the yields of treasury bills and bonds while also driving up bank deposits and lending rates, according to several bankers.
The interest rate, or yield, of treasury bonds now ranges from 12.05 percent to 12.75 percent while it was 8.03 percent to 8.80 percent in May last year, central bank data showed.
The interest rate of treasury bonds that mature within two years of purchase stands at 12.05 percent while those with a five-year tenure yield 12.40 percent as quoted at separate auctions this month.
The yield of treasury bonds with a 10-year maturity period is 12.55 percent, while it is 12.65 percent for those which will mature in 15 years and 12.75 percent for those maturing in 20 years.
The government is using these securities to borrow heavily from commercial banks as the regulator stopped printing money to avoid fuelling inflation at the start of the ongoing fiscal year.
Inflation has stayed above 9 percent for the past 20 months.
During the July-May period of fiscal 2023-24, net government borrowing from the banking sector stood at Tk 50,899 crore, central bank data showed. The government borrowed Tk 70,558 crore from commercial banks and repaid Tk 19,659 crore to the central bank.
"The money market is facing pressure owing to the government's tight fiscal situation," said Mohammed Nurul Amin, a former chairman of the Association of Bankers Bangladesh.
As the country's revenue earnings are not growing in line with expenditures, it has become fully dependent on the banking system for funding to meet the budget deficit.
"The higher bank borrowing at an elevated interest rate will increase the government's interest expenditure."
DEPOSITS, LENDING RATES ON THE RISE
Bankers say they are now raising the deposit rates to attract funds and pushing up lending rates.
For example, NRB Bank is marketing a deposit scheme with an interest rate of more than 14 percent.
Likewise, a growing number of banks suffering from liquidity shortages are offering interest rates ranging from 10 to 14 percent on their deposit products.
In March, the highest deposit rates at private commercial banks were between 8 percent and 9.50 percent.
Most banks also opted to increase their lending rates after the withdrawal of the SMART formula.
Now, consumer loans have an average interest rate of 15.50 to 16 percent while that of SME loans is 15 percent and industrial loans is 13.50 percent. However, the rates vary from bank to bank.
Md Shafiul Azam, managing director of Modhumoti Bank, told The Daily Star the banks offering high interest on deposits are experiencing liquidity shortages.
"The central bank has allowed banks to revise their interest rates once each month. We have to raise the interest because we are not getting deposits at lower rates."
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