Sri Lanka CB Governor defends EPF bond purchases
ECONOMYNEXT – Sri Lanka’s Central Bank Governor Arjuna Mahendran defended the Employees Provident Fund’s purchases in the secondary market, which is under the control of the agency at a February 25, 2016 press conference.
Excerpts from the press conference.
Question: Governor, the EPF has been buying the secondary market recently quite heavily, long bonds. What is the rationale for going heavily into the secondary market?
Governor: I thought they stopped. No, they haven’t been buying anything in the last few weeks. In fact some of the primary dealers are complaining to me that as a result you know… volumes are drying up in the secondary markets.
Question: The EPF is buying quite heavily in the secondary market at much lower at lower rates than the auction rate? What is the rationale not to go to the auction and buying like one and a half….?
Governor: …No, no, the EPF is a regular bidder in the auction. At every auction they bid along with the primary dealers. That’s why we have auctions so that so you know you get a market rate.
Now if the EPF bids lower than its competitors in the market, it will lose out and won’t get full allocation on whatever it wants to buy.
And then it has to go into the secondary market. That is how any market player operates. You go into the primary market and you bid that is how we establish a reasonable market rate, in the primary auctions. Then if you have unsatisfied demand, then you go and buy in the secondary market.
Now if the secondary market prices move against you or in favour depends on your reading of the market situation and all that. The point is that the market system has to work.
At the end of the day we cannot have private placements and negotiated rates of interest. That is a thing of the past.
So the EPF probably… I mean they go into a primary auction and they have surplus cash after the auction, because they did not get the full allocation they asked for, and they necessarily have to go to the secondary market to earn a yield on that balance cash. Right?
Question: Can you give us information on how much? Say for example the EPF has been buying in the secondary market versus the auction? I mean if they are so unsuccessful at the auction – unusually, than they were in the past. Why are they so unsuccessful, when in the past they were not so unsuccessful?.
Governor: How can you say they were so unsuccessful? That is dependent on how skilful the managers are in getting allocation right? So they are bidding against the market. Now the market has a view. That rates are going up or down. In a volatile situation like now, because the currency is volatile etc, interest rates are sort of moving in both directions on a daily basis. I do not think the EPF is doing any worse than anybody else out there. How are you judging that they are doing badly?
The point is they are giving 10.5 percent yield on their entire portfolio of 1.4 trillion rupees which to me is a remarkable attestation to their skills. These guys are superb. The EPF managers in my opinion is some of the best guys I have worked with in fund management.
To be generating 10.5 percent yield on a portfolio of that size in a market where interest rates have been falling sequentially for the last five years is I think heroic. And I give them full marks.
Question: As to the success in the primary market, what I am saying is there were 35 bonds, 2041 bonds. For example the 41 bond was auctioned at 12.05. 12.04, 12.09. I think it went up to 12.20 in the cut-off. We don’t really get the cut-offs now. But then two weeks later we find the EPF buying at 10.80 and 11.00. May be one percent off the auction rate. Subsequently there is another auction at a similar rate (12.15). We did not see that kind of actions by the EPF in the past. They used wait and put at auctions. These wild variations they are investing at, isn’t that unusual?
Governor: I don’t know sorry, I would like to see the data. But the points is this. Interest rates were coming down in early January. And you know they, they subsequently move up, that is part of the reason why we raised interest rates, so that they did not fall too precipitously. Right? Our job at the central bank is to see that rates are kept reasonably stable. Now if the EPF was buying at a lower rate – I would imagine that it was because they got a big cash inflow, of the monthly EPF contributions and they can’t just let that money lie around. They probably put it in… bought bills in the secondary market.. to get 10.8 percent, which is better than putting it in overnight call deposits where they would get only 4 or 5 percent.
So that’s the fund manager’s decision. But I don’t know, what is your point?
Question: My point is if they are so skilful, why are they putting at 10.8 percent, even if they waited another two or three weeks….?
Governor: (Interrupting) They cannot get 10.8 percent anywhere else.
Question: No. Even if they waited another three weeks in the call money the next auction went at the same rate – at about 12.00
Governor: That is with hindsight. No. If you are fund manager sitting there and the rates are 10.8 percent how do you know whether it is 12.00 or 9.0 percent next week? They took a better judgement and made that call. I don’t see the point. The guys are sitting on cash they have to generate 10.5, 11 percent every year so he is managing that skilfully. I think getting that kind of return, year after year, for the last 20 years is a great testament to the skill of these people. There are very few funds, anywhere in the world that give those sorts of returns.