Surplus Cash in Bangladeshi Banks Drives Short-Term Sovereign Rates Down

Yields on Bangladeshi government treasury bills have undergone a notable retrenchment, dropping by 21 to 25 basis points within a week as commercial banks grapple with an influx of unallocated liquidity alongside subdued demand for private-sector credit.

Official statistics released by Bangladesh Bank on 16 August demonstrate that the yield on 91-day treasury bills plunged past the 9% threshold, settling at 8.93% down from 9.19% the previous week. Rates across longer durations mirrored this trajectory: the yield on 182-day paper contracted to 9.07% from 9.32%, whilst the return on 364-day instruments eased to 9.13% from 9.33%.

Financial sector executives attribute the sharp contraction in rates directly to the expanding pool of excess reserves held within commercial banks and the simultaneous hesitation of private businesses to take on new debt. According to central bank disclosures, surplus liquidity across the banking sector swelled by Tk80,123 crore during June to reach Tk4,08,000 crore, building upon previous balances of Tk3,27,877 crore in May, Tk3,77,235 crore in April, and Tk3,78,134 crore in March.

The expanding pool of idle capital is largely the result of steady growth in retail and corporate deposits. High deposit rates offered by institutions seeking to fortify their capital bases helped boost year-on-year deposit growth to approximately 11.5% by May. With private credit expansion remaining sluggish, major lenders have redirected their surplus funds into government-backed securities to secure risk-adjusted returns, thereby accelerating competition at auction and driving yields downward.

This shift in institutional strategy is reflected in government borrowing totals. Commercial bank investment in treasury bills and bonds climbed to Tk7,95,359 crore in FY26, up from Tk6,93,725 crore in the preceding fiscal year. Banks, alongside insurance firms and institutional investors, have increasingly relied on sovereign paper as a primary investment channel amidst limited credit opportunities elsewhere in the market.

The recent decline in yields highlights a shift from the volatility observed in previous quarters. Following Bangladesh Bank’s removal of the fixed 9% lending rate ceiling on 1 July 2023 and the implementation of a market-oriented reference rate structure under the SMART mechanism, sovereign returns spiked dramatically, with treasury yields occasionally exceeding 12% in FY25. During that phase, deposit rates hovered between 9% and 11%, attracting substantial interest from individual retail investors. However, with leading banks trimming deposit interest rates by 50 to 100 basis points since August to manage interest expenses, money-market yields appear to be stabilising at lower levels.