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Monday November 29th, 2021
Bonds & Forex

Sri Lanka bond auction bids mired in uncertainty after 2 and 4 year de facto policy rate hikes, SRR

ECONOMYNEXT – Sri Lanka bond markets are mired in uncertainty after hikes controlled yields in bonds which have become signaling mechanism and de facto policy rates through which large volumes of money is printed, which will reduce bids for a bill and bond auction this week, dealers said.

Markets are now mired in a bewildering number of de facto rates along the yield curve.

The central bank has announced a ceiling rate of 8.55 percent for 2025 bonds at an auction that is closing on August 30, compared to a ceiling rate of 7.5 percent in an auction on July 29, which also failed injecting 53 billion rupees in the banking system.

However since the auction policy rates have been raised 50 basis points.

“If there were no cut-off rates (price ceilings) and there was no rate hike, the auction would have got subscribed at these levels,” a dealer said.

“Now people are wondering what to do and there is a high degree of uncertainty.”

This week the 12 month rate which was raised to 5.93 percent from 5.38 after the 50 basis point overnight rate hike was again raised by 04 basis points to 5.97 percent.

The 12-month de facto rate is however still below the 6.00 percent overnight money printing rate.

The central bank has printed about 100 billion rupees through the overnight window up to August 27 for banks which are short of liquidity. Well managed banks however have about 100 billion parked in the deposit window of the bank.

This month the central bank also resumed repo auctions taking excess money out of the market at around 5.74 percent, above the floor 5.50 percent rate.

A bond maturing on 15.11.2023 was quoted at 7.00/25 percent around the same levels as 7.00/7.10 percent on Friday.

A bond maturing on 01.12.2024 was quoted at 8.00/10 percent hardly changed from 8.00/8.15 percent Friday.

Sri Lanka began announcing pre-auction price ceilings for bond auction and started buying them into the central bank turning them into reserve money redeemable against US dollars effectively turning the price controls into de facto policy rates when auctions failed and triggering forex shortages.

Sri Lanka’s reserves have rapidly dwindled rapidly in the face of controlled rates as private credit picked up on top of large budget deficits. Forex reserves are now below 2-month of imports, though an International Monetary Fund handout of special drawing rights can boost it by about half a month.

The de facto medium term policy rates were a culmination of a series of market controls that began during the last administration involving so-called ‘Stage III’ auctions, lending as well as deposit rate controls that sought to reverse economic realities in credit markets and generate monetary instability.

The last administration also jettisoned a bills only policy, allowing bonds to be bought in to the central bank balance sheet through outright purchases, eliminating its ability to collect forex reserves, paving the way to the current crisis, analysts who warned of such outcomes have said.

Analysts have dated the current currency crises to around August 2019, when the bond buying program resumed.

The 50 billion rupee bond auction on August 30 has to be settled on September 01.

This week Treasury bill auction of 68.5 billion rupee is also closing on September 01.

The central bank however also doubled the statutory reserve ratio from 2.0 percent to 4.0 percent effective September 01, which is expected to absorb around billion rupees of excess liquidity this week even if both auctions fail.

Related

Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT: Bellwether

Analysts have said that it is vital to have a functioning auction system to generate rupees and solve the ‘budgetary’ problem so that foreign loans can be repaid (the ‘transfer’ problem) and for currency depreciation and forex shortages to end. (Colombo/Aug29/2021)

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