Skip to main content

Why Interest Rates Are Rising in Bangladesh

Treasury yields are rising in Bangladesh. The rise in yield of short-term treasury securities is much more pronounced than the rise in yield of long-term treasury securities. For instance, the yield of the 182-day T.Bill went up to 10.40% from 3.89% two years earlier. You can think of this yield as a return on treasury securities.  

Animated Line Chart - 182 Days Treasury Bill Yield
Bangladesh 182 Days Treasury Bill Yield

Animated Line Chart with Traces

Bangladesh Treasury Yield Curve (%)

Source: Bangladesh Bank

In the treasury market, the government issues treasury securities to borrow money from institutions, the general public, and sometimes the central bank. Against the borrowed money, the government provides a return on the money borrowed. It is called yield. You can also think of it as the interest rate on the bond or bill.

Through the example of the treasury market, let’s understand how interest rates are determined.

Think of treasury market as any commodity market. So, how is the price of a commodity determined in a free market? The answer is supply and demand, right?

When demand for a commodity rises, keeping all other things constant, the price of that commodity increases.

When the supply of that commodity rises, keeping all the other things constant, the price of that commodity decreases. You know this quite intuitively.

Now, let’s look at the treasury securities market.

What is the commodity in a treasury market? Money is the commodity here. To be more clear, it is the use of money for a fixed period.

Who is on the demand side of this market? The government is on the demand side because it is borrowing. So, the government is demanding money. Then who is on the supply side? Financial institutions, private institutions, the general public who are willing to buy government treasuries, and the central bank when it is buying the securities by printing new money in the economy.

If money is the commodity here, what is the price of money. It is interest rate or return provided on the money borrowed by government and lent by institutions and public.

Now, let’s think of few situations.

Say the government presents a big expenditure plan for the new budget. It increases its borrowing to meet the expenditure. Liquidity (available money that is investable) in the financial institutions stays the same as previous year. The government increases its issuance of treasury securities for borrowing. So, demand has increased and supply has stayed the same. What is the most likely impact on the interest rate? It’s obvious, right? The interest rate should increase.

Let’s think of another situation. Government borrowing through treasury securities stays the same as before and liquidity in the financial institutions improves. What would happen to interest rate? You guessed it right. It should decline.

In this framework, you can draw multiple scenarios and think of what should be the impact on interest rates.

Now, the question is why the treasury rates in Bangladesh are rising now.

Supply side: Think of the supply side. Liquidity in financial institutions is declining. There are mainly two reasons for that. Due to the lower inflow of foreign currency compared to the outflow, the central bank is selling foreign currency to commercial banks to keep the exchange rate relatively stable. When the central bank sells foreign currency (USD), it mops up the equivalent amount of domestic currency (BDT).

Also, deposit growth has been low compared to historical averages which also puts a drag on liquidity of financial institutions.

The central bank bought treasury securities for some time to keep the interest rate at some level but in the last two and a half months they stopped buying, which also squeezed the supply of money in treasury market.

Here, the treasury market is different from any other commodity market. There is an authority who can supply an unlimited amount of money (which is the commodity here) at will. But most central banks don’t do it because it will lead to hyperinflation. So, they take a measured approach to providing liquidity to the market. Recently, central bank of Bangladesh has decided that the will not provide liquidity by buying treasury securities for some time.

Demand Side: The government doesn’t only borrow through treasury securities. It also borrows a good amount from Sanchaypatra, another government-backed security. Sanchaypatra sales have also gone down significantly. So, the government now has to rely more on treasury.

Recent policy rate hikes have also signaled to the market that the central bank is willing to let interest rates go up.

The combination of these factors has pushed up the treasury rates sharply in last few weeks.

Popular posts from this blog

How Food Delivery Apps Make Money

Third party food delivery is proving to be a tough business space with minimum option to differentiate, tight profitability margin and intense competition that is putting the industry in the process of more and more consolidation.  When Uber started and turned into something that people would use everyday, it became obvious that the idea of moving people from Point A to Point B with the help of an app would branch into Uber for other services like food delivery, groceries or any other parcel. The world of convenience economy was only about to expand. Like Uber, an app would connect merchants to consumers via riders. The app is a platform that help connect these three parties that are required to make a transaction and shipment. The space that was ripe for disruption in this convenience economy was restaurants. Most restaurants didn't have their own delivery logistics. There were only few exception that you can think of that had their own delivery logistics. They had so because they

What to Look for in a Cash Flow Statement

Cash flow statement demonstrates the flow of cash coming into a business and going out from a business. It differs from income statement because cash flow statement is recorded on a purely cash basis. In income statement, if a business booked a sale of a product or a service and was yet to receive cash from the customer, the business would record it as sale in its income statement. On the other hand, if the business purchased raw materials for the products they sold or incurred cost for the service they provided, they would record this expense as cost of sales or cost of service regardless of whether the transaction was on a credit basis or cash basis. This method of accounting is called accrual accounting which is the most used method of accounting for income statement. So, cash flow statement gives you a different perspective. Since, it records how much cash is coming into a business and going out from the business through operating activities, investing activities and financing acti

Understanding Free Cash Flow

When I was first introduced to the concept of 'free cash flow' back in my BBA program, I didn't grasp it as clearly as I should or could have. I blame myself for not putting in enough effort to understand the concept back then.  Now that I have spent a considerable amount of time using ‘free cash flow’ as one of the major valuation methods, I can see how this concept can be learned in an effective way. In this article, I attempt to explain how businesses generate free cash flow, what it means to investors, and why and how free cash flow is used in company valuation. The Basic In a nutshell, free cash flows are the cash flows available for distribution to suppliers of capital . When we consider free cash flow to the firm (FCFF), it is the cash flow available to both debtholders (those who lend to the company) and stockholders or equity holders (those who buy the stock of the company or have equity ownership of the company). And when we consider free cash flow to equity

History of Money and Monetary Systems

From ancient Rome to modern world, money has gone through an evolutionary process. For the Roman empire, scarcity of silver and gold meant resorting to debasement to create new money. For the Inca empire, the same silver and gold was sacred precious metals coming from the hand of God. Spanish empire hunted for these precious metals to accumulate power but in truth abundance of silver lowered the value of the metals for which they had unquenchable lust. But over the course of time, the concept of money turned out to be a simple narrative installed in the minds of the people. The truth of the matter is, be it gold or silver or simply a piece of paper or the digits in your mobile wallet, the money has the value only if other people value it the same way. It's a machine driven by trust. The narrative of money has made a significant contribution to the progress of humankind. Although It was often flawed and we are yet to find a perfect system, the concept of money was one of the greates

How Pinduoduo Made it Big | History of Pinduoduo

Alibaba (Taobao and Tmall) and JD was dominating the China e-commerce space and no other company was able to match their scale until a new company emerged with an aim to serve the tier 3 and 4 cities that remained underserved. It focused on perishable products and daily necessities to make sure the users have high purchase frequency and it was also their category of choice because of low competition. It growthhacked its way by offering group buying feature at too good to believe discounts. It took it to the next level by focusing on interactivity by making the app browsable for fun and rewards. The company’s IPO prospectus referred to the platform as mix of Costco and Disneyland, the pricing is the Costco part and the fun browsing is the Disney part. Pinduoduo built a recipe for building a social commerce platform that mimicked the way people shop offline. It took cues from the gaming world to entice users to spend time on the app. All these viral elements made Pinduoduo the largest e