The yield on 10-year bond dropped below 10%
Yields on treasury bills and government bonds have been falling over the past three months, ending the upward trend that began two years ago amid rising demand for funds from both the government and the private sector.
This week, interest rates on all Bangladesh government bonds for all tenures declined further.
The yield on the 10-year bond dropped to 9.89 percent, its lowest since September 2023 and below the Bangladesh Bank's policy rate of 10 percent.
"It is a reflection of market sentiment that the policy rate may decline in the coming months," said Ashim Kumar Saha, deputy managing director of Mercantile Bank PLC.
This is the first time in two years that the 10-year government bond yield has fallen below 10 percent. In June last year, the interest rate on the same bond stood at 12.59 percent, the highest since July 2023.
At present, the 20-year bond carries the highest yield at 10.30 percent, thanks to a gradual improvement in liquidity in the market.
A number of factors, such as easing inflation, weak credit demand from the private sector amid economic slowdown and political uncertainty, and the sluggish pace of government development projects, have contributed to the steady decline in interest rates.
At the same time, fund flow has increased as a result of the purchase of $1.74 billion by the Bangladesh Bank since July and rising remittance stream.
Saha said more than Tk 20,000 crore had been injected into the money market through the greenback purchase by the central bank to ensure stability in foreign exchange.
SM Galibur Rahman, head of research & strategic planning at Shanta Securities, said the government had not borrowed from the market in August and September.
Besides, non-bank investors have increased their holdings of government securities, indicating a stronger flow of funds.
"Liquidity flow is rising and the downward pressure on interest rates may continue. But it is unlikely that overall yields will drop drastically. It may hover around 9 percent in the next six months," Rahman said.
Mamun Rashid, chairman of Financial Excellence, said the high interest rate to curb inflation did not work in Bangladesh, perhaps because of market distortion. Instead, it had badly affected investment, especially in the small and medium enterprises (SMEs) category.
Now, with treasury bill and bond rates falling by more than 200 basis points, bank lending rates should also come down, encouraging investment, said Rashid, a former CEO of Citibank, NA Bangladesh.
Ashraf Ahmed, former president of the Dhaka Chamber of Commerce & Industry (DCCI), said, "With lower yield for T-bills, the necessary pre-condition for the much-needed reduction in interest rates for corporate loans is now in place.
"Over the last year, most businesses have been struggling to meet interest obligations, partly because of the high interest rates. Financial stress can be reduced substantially with lower rates, which will also help recover many of the loans that have been pushed to sub-standard levels," added the former DCCI president.
