ECONOMYNEXT – Sri Lanka’s central bank has bought June 2025 bonds at 29.0 percent and January 2025 bonds at 30.50 percent outright in a bid to signal lower interest rates at the longer end of the yield curve.
The outright auction for 15 January 2025 bonds drew 8.9 billion rupees of responses.
The monetary had accepted offers of between 30.50 percent and 32.00 percent giving an average yield of 30.80 percent totaling 3.7 billion rupees.
In the outright auction to buy 01 June 2025 bonds, the total 500 million rupees in offers were accepted at 29.00 percent.
Outright purchases of bonds to target the yield curve had been blamed by analysts for the 2018 currency crisis and the end of reserve collection in late 2019 (start of BOP deficits) as private credit picked up.
But private credit is now negative and Sri Lanka’s Treasuries yields have topped 30 percent.
Unlike in earlier years the central bank has not floated the rupee to quickly restore credibility of the exchange rate peg. A peg at 360/370 is now holding with high rates.
The high Treasuries yields are coming from a flaw in the International Monetary Fund’s default resolution framework where clear early decisions are not made domestic debt re-structuring.
The budget deficit is also being reduced compared to a year earlier with inflationary revenues and tax hikes but rates have been stubbornly high.
Most of the countries that defaulted since the 1980s and go to the IMF have highly unstable soft-pegged exchange rate regimes (flexible exchange rates) which collapse reducing the value of real savings. (Colombo/Jan04/2022)