Sri Lanka bonds down after China loan, rupee opens steady
ECONOMYNEXT – Sri Lanka’s bond yields were slightly higher on Thursday morning but were sharply down from before a billion dollar loan from China came to the country, while the rupee opened slightly wide from yesterday’s close.
A three-year bond maturing in 2021 was quoted at 11.05/15 percent, down from 11.40/50 levels on Tuesday but slightly higher than the 10.90 percent levels the bond traded Wednesday.
A five-year bond maturing in 2023 was quoted at 11.53/60 percent, down from 11.70/74 percent before the loan, but slightly up from 11.40 percent levels that trades were done yesterday.
The spot US dollar was quoted at 171.0/20 percent, slightly wider from 171.0/05 a day earlier.
Sri Lanka’s monetary policy is broadly supportive of the rupee, with overnight rates close to the ceiling policy rate of 8.50 percent.
The weighted average yield of the interbank call money market was 8.44 percent, on Wednesday, according to central bank data, though the central bank injected overnight money as low as 8.32 percent.
As of Wednesday, the central bank had injected about 122 billion rupees through term and overnight auctions and the 8.50 percent window, to sterilize interventions in the forex market and maturing swaps.
Last week, another 7 billion rupees were permanently sterilized by a non-transparent purchase of Treasury bills at an unknown rate. So far this month, the Treasury bills stock representing permanent sterilization had risen by 26 billion rupees.
On Wednesday 20 billion rupees of six-day money was injected at 8.38 percent, below the overnight ceiling policy rate of 8.50 percent.
About 10.6 billion rupees of 14-day money was also injected at 8.43 percent, far below the seven-day Sri Lanka Interbank Offered Rate of 8.71 percent published by the central bank.
Some of the liquidity shortages in the system now are due to maturing legacy swaps dating back to 2013.
It is not clear how authorities will use the China loan, though most of it may go to repay foreign loans. If some of it is used for budgetary purposes, and is sold in the market, a float of the rupee will be supported, analysts say.
If US dollars are surrendered to the central bank, new money will be created, reducing the liquidity shortage in money markets. In the past, authorities have used US dollar loan proceeds to generate large volumes of rupee liquidity and worsen currency pressure, thus undermining a float of the currency. (COLOMBO, 18 October 2018)