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Sri Lanka fails to sell 97-pct of Treasuries at auction after downgrade

ECONOMYNEXT – Sri Lanka failed to sell 97 percent of offered Treasury bills at Tuesday’s 40 billion rupees auction, raising only 895 million rupees from real buyers, data from the state debt office showed.

The debt office offered 8.0 billion rupees of 3-month bills and all bids were rejected.

Out of 16 billion rupees of 6-month bills offered only 407 million rupees was sold at 4.64 percent, flat from last week.

Out of 16 billion rupees of 12-month bills offered only 488 million rupees was sold at a weighted average yield of 4.89 percent, against 4.88 percent last week.

Sri Lanka’s bond yields edged up on Tuesday, and spreads widened after Moody’s downgraded Sri Lanka’s sovereign rating to Caa1 (CCC+ equivalent) overnight.

Sri Lanka’s central bank has monetized large volumes of debt to target 3, 6 and 12-month yields in 2020.

When domestic credit picks up failures of domestic Treasuries auctions, which are monetized (debt securities turned into bank notes exchangeable for dollars and real goods) will pressure the currency peg and generate excess demand.

In previous currency crises – when private credit was strong – entire auctions had been rejected, and new rupees created, sometimes to sterilize interventions already made. (Colombo/Sept29/2020)