Government borrowing demand pushes up Treasury bill yields: 91-day yield rises from 8.13% to 8.55% in three weeks, October borrowing heading for Tk 60,300 crore

In Dhaka, the cost of borrowing from the banking sector is rising as the government's demand for loans increases. Treasury bill and bond interest rates are climbing rapidly as a result. In just three weeks, the yield on 91-day Treasury bills has risen by 0.42 percentage points.

According to Bangladesh Bank data, the yield on 91-day Treasury bills was 8.13 percent at the auction on October 5. At the October 26 auction it rose to 8.55 percent. Yields on bills and bonds of other maturities have also risen this month; the yield on 15- and 20-year bonds is now 9.38 percent.

The government's increased borrowing demand is cited as one of the main reasons for the rising rates. Up to October 27, the government had raised Tk 55,300 crore through Treasury bill and bond auctions.

An auction was called for Wednesday, October 28, to raise a further Tk 5,000 crore through a 14-day special Treasury bill to pay arrears under the new pay structure.

If the government meets its target in that auction, total borrowing from bill and bond auctions in October will stand at Tk 60,300 crore. That would be the highest amount borrowed in a single month under the current government.

Government borrowing rates are rising even though the banking sector has no shortage of funds. At the end of August, surplus liquidity in the banking sector stood at Tk 4,42,000 crore. Ordinarily, ample liquidity in banks would mean less pressure on borrowing rates, but the government's large borrowing demand has changed the situation.

Because the government keeps seeking loans, banks are bidding at higher rates in the auctions. The government, in turn, is borrowing at those high rates to meet its needs. As a result, the cost of government borrowing is not falling despite ample funds in the banking sector.

In the budget for the current 2026-27 fiscal year, Tk 1,27,500 crore has been allocated for interest payments on loans. In last fiscal year's original budget, the allocation for this sector was Tk 1,22,000 crore; it was later raised to Tk 1,27,000 crore in the revised budget.

About 90 percent of this year's interest payment allocation will be spent on interest for domestic borrowing. The amount is close to the Tk 1,31,284 crore kept for government employees' salaries, allowances and pensions. In other words, about 14 percent of the total budget will be spent just on paying loan interest.

A large part of the government's domestic borrowing comes from Treasury bills and bonds. When the yields on these securities rise, interest on new borrowing also rises. When old bills and bonds mature, new borrowing is needed to repay them; if higher interest has to be paid than before, the government's debt management costs rise further.

In the first three months of the current fiscal year, the government raised about Tk 1.5 lakh crore through Treasury bill and bond auctions. But net government borrowing in that period rose by only Tk 24,245 crore. In other words, a large part of the money raised through auctions was spent repaying previous loans.

If rates keep rising in this situation, the cost of new borrowing to repay old loans will also increase. That will create pressure on government debt management, and, as in last fiscal year, the interest payment allocation may need to be raised again this year, the report said.

If banks can earn higher profits from the comparatively safe investment of government Treasury bills and bonds, their interest in lending to the private sector may fall, because private-sector lending carries risk and uncertainty over loan recovery, while government securities offer profit at comparatively lower risk.

The effect has already been seen in private-sector credit growth. In the 2025-26 fiscal year, private-sector credit growth was only 4.47 percent. Over the same period, government borrowing grew by more than 34 percent.

If government borrowing demand and interest rates keep rising, the flow of credit from banks to the private sector could come under further pressure. The report noted the risk that this could hinder business expansion, investment and the pace of new job creation.