ECONOMYNEXT – Foreign investors have sold down about 25 billion rupees of bonds over the last four weeks, continuing a trend that had gathered pace with a rate cut in April 2015, official data show.
The surprise April rate cut came amid pressure on forex markets and rising state borrowing from domestic markets to finance subsidies and state worker salary hikes.
Sri Lanka’s interest rates spiked from late February amid a controversial auction in bond markets. In March large volumes of bonds were sold or rolled over at higher than recent earlier rates, but rates fell later.
The rate cut on April 15, also helped push rates down.
When rates are cut investors in long term bonds can make large profits. When the yield of a bond falls the underlying price rises giving a capital gain. When the maturity is longer capital gains are higher.
Official data show that foreign investor holdings in Treasury bonds which were steady around 455 billion rupees by March had climbed to 465 billion rupees by April 15, when the sell-off began.
Over June, medium term bonds, especially in 5 and 6 year tenors rose as foreign investors sold out. However longer term yields were steadier with yield curve flattening somewhat during late June, according to dealers.
Analysts say the behaviour shows that bond markets are responding well to market signals.
The Central Bank is no longer engaging in private placements that may hide and delay price signals and supply responses, which then lead to economic imbalances and balance of payments troubles.
However a steady pattern of debt monetization seems to be emerging, according to other analysts.
According to the latest data, foreign holdings of bonds fell to 425 billion rupees, down from 432 billion rupees a week earlier.
There was also a sharp sell-down of rupee bonds by foreign investors in the last quarter of 2014, but selling then eased off.
Though there has been selling in rupee bonds, which could also be due to expectations of depreciation, foreign investors have been buying new government dollar debt indicating their willingness to finance Sri Lanka, despite some political uncertainty, analysts say.
When a currency depreciates the real value of all debt – both private and public – is destroyed, though domestic economic agents don’t experience it instantly, until prices of traded goods move up.
But through buying dollars in the kerb market and holding foreign currency accounts, residents can try to avoid indirect expropriation through depreciation, analysts say.