Sri Lanka fails to sell 60-pct of bills at Treasuries auction under explicit price ceiling

ECONOMYNEXT – Sri Lanka failed to sell 60 percent of the bills offered at an auction Wednesday under a price ceiling scheme that started earlier in the year as excess liquidity to triggered monetary instability, official data show.

The debt office which is a unit of the central bank, offered 39.5 billion rupees of bills at the weekly auction and had sold only 11.9 billion rupees to real bidders.

The debt office failed to sell 84 percent of the 12-month bills.

It is not clear whether the balance would be bought by the central bank, with printed money expanding reserve money. The central bank also holds 290 billion rupees of bills most of it bought from March to trigger monetary instability and forex shortages. Some date back from the 2018 currency crisis.

Any maturing bills in the central bank balance sheet could be rolled over without expanding existing liquidity.

In the last few weeks the central bank has withdrawn some excess liquidity, reducing potential losses of forex reserves as well as the chances of dollar sovereign default later.

Out of 9.0 billion rupees 3-month bills offered at the auction this week only 5,875 billion rupees were sold at at 4.59 percent unchanged from last week.

Under new scheme cooked up by the debt office in the last quarter, a cut-off ceiling yield (price floor for the bill or price ceiling for the yield) is announced before the auction. A 3.60 percent ceiling was pre-announced for 3-month bills.

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After offering 6.0 billion rupees of 6-month bills only 2.17 billion rupees was sold at the auction at an average yield of 4.68 percent against 4.69 percent last week. A ceiling rate of 4.69 percent was set before the auction.

After offering 24.5 billion rupees of bills at the auction only 3.9 billion rupees in bids was accepted at 4.86 percent unchanged from last week, failing to sell 84 percent of the offered volumes. A ceiling rate of 4.86 percent was pre-announced.

This week the higher overnight rate was 4.70 percent. Sri Lanka also sold dollar bonds are rates higher the rupee Treasuries.

Sri Lanka has previously forced bonds of dealers at pre-determined rates and had also used window money to buy bonds (buffer strategy) without directly buying bills at auction.

But in 2020, 67 billion rupees of money was printed to defend a fixed pattern of interest rates beyond the overnight rate. Under Governor Coomaraswamy the central bank also broke a ‘bill only’ rule for liquidity injections set by then Governor A S Jayewardene, defending rates beyond one year. (Colombo/July29/2020)