Sri Lanka fails to sell all offered bonds at auction under yield ceilings

ECONOMYNEXT – Sri Lanka has sold 103.2 billion rupees of bonds out of 110 billion rupees of securities offered at an auction on July 30, under pre-set yield ceilings, data from the state debt office showed.

The debt office offered 45 billion rupees of 2-year, 3-month bonds maturing on 15.11.2022 at a yield ceiling of 5.75 percent and sold only 38.2 billion rupees of securities at an average yield of 5.73 percent.

A close maturity of 15.12.2022 was trading around 5.70/75 percent before the auction. The bond was quoted around 7.73/78 after the auction, dealers said.

After offering 35 billion rupees of 5-year, 6-month bonds maturing on 01.02.2026, all were sold at an average yield of 6.50 percent after announcing a cut-off of 6.52 percent.

An offer of 30 billion rupees of 7 year bond maturing on 15.08.2027 was also successful at an average yield of 7.05 percent.

Before the auction 15.10.2027, a close maturing was trading around 6.90/7.00 percent. A 7.08 percent ceiling yield was announced.

The yield had moved up a little after the bond auction was announced dealer said.

In 2017 as part of several moves away from market, dealers were forced to buy unsold bonds in a so-called third stage.

Critics had warned that the forced purchases could lead to capital erosion and failures of the primary dealer system.

However the most egregious anti-market move had been removed in 2020 and in the so-called second stage dealers are offered bonds at the weighted average yield. They are free to refuse.

According to market estimates at least 103 billion rupees of bonds are maturing and all were rolled over.

The yields are also sharply below the coupon, which means the Treasury would be able to raise more money than the face value. The 01.02.2026 bond on which 35 billion rupees of face value securities were sold, would have bid price of over 111 rupees per 100 rupees of face value.

In 2018 as part of moves to trigger a balance of payments crisis, under a so-called buffer strategy, a part of the maturing bonds were turned into reserve money by overdrawing state banks with lender of last resort liquidity. (Colombo/July30/2020)