Sri Lanka bond quotes wide, yields higher after 30-year auction

COLOMBO (EconomyNext) – A 30-year bond auction, where the state debt office accepted nine times extra bids has left market participants reeling as yields soared to unexpected heights, and bonds opened higher with wide quotes indicating market uncertainty.

Overnight rates also moved up after the Central Bank lifted a restriction on placing excess funds at its 6.5 percent window that forced market participants to deposit excess cash at 5.0 percent at the Central Bank.

Overnight money was quoted at 7.00/7.25 percent with business done, up from 6.25/6.50 percent last Friday. Gilt-backed repos were at 6.75 percent levels up from 5.50/6.00 percent levels last week.

A 2-year bond was quoted at 7.25/8.25 up from 7.20/40 percent Friday while a 3-year bond was quoted at 7.50/8.30 percent up from 7.40/70 percent Friday when the highest deal was at 7.75 percent.

A 6-year bond was quoted at 8.10/9.10 percent up from 8.20/40 percent on Friday.

A 7-year bond was quoted at 8.30-8.90 percent ad up from 8.25/50 with the highest deal at 8.20 Friday

On Friday the state debt office sold 10 billion rupees of bonds to the market at an average yield of 11.73 percent sharply higher from the 9.30 percent rates at which bonds were placed earlier and the rates of around 9.50 percent indicated to the market.

After offering a billion rupees of bonds at the auction, 900 percent extra or a total of 10 billion rupees was accepted from the market at rates as high as 12.50 percent according available information.

All dealers are expected to place bids of 10 percent of the volumes of an auction.

The practice of taking more than the offered amount give wrong signals to the market but has been practiced by the debt office even earlier, even during dollar bond auctions. But when much larger volumes are accepted, the negative effects are greater, market participants say.

In the auction, so-called ‘dummy bids’ place far higher had also been accepted but dealers who put serious bid at lower rates now had marked-to-market losses. 

A dealer who placed a bid at around 10.0 percent marked-to-market make a loss of about 10 million rupees when the yield went up by 100 basis points for every 100 million rupees of 30-year bonds.

Correction: A dealer who placed a bid at around 10.0 percent marked-to-market make a loss of about 10 million rupees when the yield went up by 100 basis points for every 100 million rupees of 30-year bonds.