ECONOMYNEXT – Sri Lanka’s 3-month Treasury bill yield rose 89 basis points to 8.04 percent at Wednesday auction data from the state debt office showed, as interest rates continued to catch up with the budget deficit.
The debt office offered 85 billion rupees of bills and accepted 50.4 billion rupees from the market.
It is not clear how much of the bills are already with the central bank.
Bids for 6 and 12 month bills were rejected.
Sri Lanka’s one year bill yields were slowly climbing up to around 8.58 percent in the first quarter of 2020 after the tax cuts in December 2019 widened the budget deficit. However rates were then cut and unprecedented money printing began.
In the past when the central bank tried to correct policy after generating monetary instability bills had to be bought later at rates higher than the rejected bids, long time watchers of policy errors say.
According to market sentiment one year bills are viewed at rates higher than 8.50 percent and some had bid even higher, which may have been why 6 and 12 months bills were rejected.
Some savers have already started to shift money from fixed deposit to three month bills. Banks are offering around 6.25 percent for three month FDs for negotiated large deposits.
Dealers say customer bids are now starting to come to three month bills. Other tenors are not considered to offer realistic yields as yet.
A quick adjustment or overshoot of rates will draw more money into Treasuries markets, analysts say.
Sri Lanka’s current economic troubles began from around September 2014 when monetary policy deteriorated into call money rate targeting, output gap targeting and then outright monetization and modern monetary theory from 2020.
Though price controls on bonds had been lifted by newly re-appointed Central Bank Governor Nivard Cabraal who is facing huge challenges in ending money printing, this week out of a 100 billion dollar bond offer only 80 billion was sold.
The central bank is not expected to buy bonds into its balance sheet and open policy rate windows along the yield curve according to section 112 of the Monetary Law Act.
In recent years the central bank has also created instability by engaging in ‘operation twist’ style exercises by purchasing bonds and selling bills to trigger currency crises.
Citizens of Sri Lanka has borne instability and social unrest from depreciating currencies since 1950 but had not taken the Monetary Board to court, for contravening individual sections of the monetary law or violating its overall mandate of economic and price stability by triggering foreign exchange shortages and depreciation. (Colombo/Oct13/2021)