Banks in Bangladesh are seeing rising excess liquidity amid weak demand for investment and loans, prompting them to increase investments in government Treasury bills and bonds. The resulting strong demand is pushing down yields on government securities.

At the same time, individual investors are showing greater interest in Treasury securities because of the assurance of timely repayment.

The trend has accelerated after Bangladesh Bank cut its policy repo rate by 50 basis points to 9.5%. Market participants, however, say lower interest rates alone will not be enough to revive private-sector investment.

Private-sector credit growth fell to a historic low of 4.47% at the end of fiscal year 2025-26. With the average bank lending rate at around 12% through June, real credit growth was effectively negative.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said banks are accumulating excess liquidity because they have limited opportunities for profitable investment. Many banks are placing funds with Bangladesh Bank’s Standing Deposit Facility (SDF) at only 7.5%, while also submitting lower bids at Treasury security auctions, pushing yields down.

He said the central bank may have reduced the policy rate to encourage lower lending rates, but loan demand is unlikely to increase unless other economic constraints are addressed. Lower lending rates could also lead to further reductions in deposit rates.

According to Bangladesh Bank data, the government raised Tk 5,000 crore through a two-year Treasury bond auction last Thursday at a yield of 9.39%. The same maturity was sold at 9.70% on July 8, compared with 10.40% in June and 12.20% in June 2025.

The yield on three-year Treasury bonds also declined to 9.90% last Thursday from 10.10% on July 8, 10.52% in June and 13.06% a year earlier.

Treasury bill yields have also declined. On August 3, the government raised Tk 3,000 crore through 91-day Treasury bills at a yield of 9.30%.

It also raised Tk 2,500 crore through 182-day bills and Tk 2,000 crore through 364-day bills, both at 9.53%.

At the final auction of July, yields on 91-day, 182-day and 364-day bills stood at 9.79%, 9.99% and 10.09%, respectively. A year earlier, the corresponding rates were 11.94%, 11.98% and 12.01%.

A Bangladesh Bank official said weak loan demand, along with banks’ caution over lending amid high levels of non-performing loans, has contributed to the buildup of excess liquidity.

Banks are increasingly turning to Treasury bills and bonds to deploy their surplus funds, with excess liquidity in the banking sector now estimated at around Tk 3.35 lakh crore.

The official also noted that several banks and financial institutions have struggled to return depositors’ money on time. As a result, depositors are increasingly considering the security and certainty of repayment, rather than interest rates alone, when deciding where to place their funds.

This has encouraged some investors to shift from traditional savings instruments toward Treasury bills and bonds, adding further downward pressure on yields.