ECONOMYNEXT – Sri Lanka bond market were illiquid Wednesday as it digested the aftershocks of a Treasury bill auction where sharply higher than expected volumes of 12-month paper were accepted a day earlier, dealers said.
There were few two way quotes in the market, though rates were only up about 5 basis points after the debt office unexpectedly accepted 30 billion rupees in 12 month bills after advertising to sell only 13 billion rupees.
Bids for 3 and 6 month bills were rejected. The weighted average yield of the 12-month bill rose 14 basis points to 9.59 percent.
"It was a bit of shock to the market," a dealer said. "We do not know what to think. One interpretation is that as much long tenor as possible was accepted because central (bank) is expecting rates to go up further."
Sri Lanka bill and bond yields rose and the rupee fell after an electoral drubbing for the ruling coalition and in-fighting among partner parties but the markets started to stabilize.
Analysts say ithe Central Bank should not to take volumes higher than advertised. If not they should give specific guidelines on how much extra volume would be taken such a 10 percent difference. Such practices were abandoned in bond markets after scams, but are persisting in bill auctions.
"Let’s say central says 5 billion rupees would be taken in 12-month bill," explains a dealer. "If I had 10 billion then I would bid the balance for 6-month bills.
"Potentially the entire market have to bid 90 billion rupees for a 30 billion rupee auction for it to be properly covered, since potentially the entire volume can be accepted in one maturity."
Dealers said the market expectations were for the 12-month yield to go to 9.45 or even 9.50 levels, though there was catch-up possible on 6 and 3 months.
The cut off yield is estimated at 9.75 percent. In Sri Lanka the cut-off is kept secret, forcing market participants to call each other to find which bids is rejected and estimate the cut-off.
"It is not correct to say that dealers want rates to go up," one dealer said. "When rates go up sharply we make capital losses.
Central cannot stop rates from going up if there is a genuine reason like higher borrowing requirement. So if rates go up in one auction they will come down later as investors come in.
"So now there is all kinds of speculation like the sovereign bond will not happen and so on and that they accepted the entire volume on the long tenor because rates will go up some more."
Officials had said they would go to markets, though global interest rates are moving up.
Market participants were also nervous after bond auction went to the so-called second phase allocation process, where weighted average yield was capped below the market clearing rate and the rest offered at that rate.
The market had long feared a proposed third phase of the auction where the balance bonds would be forcibly dumped on dealers at the weighted average yield whether they wanted the or not and rates would move up sharply the following week.
On Wednesday one year bills were quoted around 9.50/65 percent, dealers said.
On Wednesday a 01.03.2021 bond was quoted at 9.92/10.00 percent, up from 9.85/90 levels before the auction, dealers said.
A 01.08.2026 bond was quoted at 10.30/45 up from 10.30/40 levels before the auction.
A 01.08.2026 bond was quoted at 10.35/45 percent up from 10.30/40 percent before the auction.
A 15.05.2030 bond was quoted at 10.53/65 up from 10.40/55 levels before the auction.
(Colombo/Feb28/2018)