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Sri Lanka bond markets steady after auction rejection

COLOMBO (EconomyNext) – Sri Lanka’s bond market yields were unchanged Friday from the close a day earlier when the state debt office unexpectedly rejected a bond auction, after accepting bids at high rates, over several weeks, dealers said.

Bond yields fell between 40 to 80 basis points on Wednesday after a surprise 50 basis rate cut from the Central Bank as a private credit cycle was beginning to turn positive and state spending was going up with high spending on salaries and subsidies.

The auction rejection has signalled to the market that the debt office, which is a unit of the Central Bank wanted bond buyers to bid lower, in sharp contrast to its earlier practice of accepting very high rates at high cut-offs, dealers said.

Sri Lanka’s interest rates have gone on a wild ride since the a controversial bond auction on February 27, pushed up the 30-year yield by over 200 basis points potentially giving massive profits to a firm connected to the son-in-law of the Central Bank Governor Arjuna Mahendran if rates came down.

The entire yield curve also moved up, across tenors with higher rates being paid for all maturities.

All the buyers are now in marked-to-market profits, but the firms with deep discount bonds make more money, when rates go down and the opposite when rates come down.

The price of a bond rises when interest rates come down.

The following yields were quoted on bonds mid-day Friday.

2-year 15.05.2017 – 7.45/55 percent

3-year 01.06.2018 – 8.20/25 percent

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4-year 15.09.2019 8.35/40

4-year 01.07.2019 8.30/45

5-year 01.06.2020 8.88/80

6-year 01.08.2021 8.87/93

7-year 01.07.2022 8.80/9.00

9-year 01.09.2023 9.35/43

10-year 15.03.2025 9.70/77

30-year 01.03.2045 11.00/11.50