ECONOMYNEXT – Sri Lanka’s six month Treasury bill yield fell near the overnight repurchase rate at which excess money is withdrawn by the central bank, official data showed.
Sri Lanka’s 6-month Treasury bill yield fell to 8.63 percent at Wednesday’s auction from 8.71 percent a week earlier, while the one year yield fell to 8.88 percent from 8.90 percent.
The central bank mopped up 5.25 billion rupees of excess liquidity an average yield of 8.56 percent on Wednesday bringing down the aggregate balance of the banking system to 22.11 billion rupees from 31.98 billion rupees, erring on the side of caution.
The overnight rate has come down as private credit slowed, allowing the central bank to purchase foreign exchange deploying a strong side convertibility undertaking of its peg.
Analysts have urged the central bank to phase out term repurchase deals and instead gradually sell down its Treasury bill stock as it purchases dollars so that rates will naturally fall closer to the policy floor rate, due to weak credit.
Overnight interbank rates have hovered around 8.50 percent, higher than the 8.0 percent floor policy rate.
On May 28, the central bank mopped up 7-day cash for 8.6 percent, erring on the side of caution, paying the correct market rate for its objective of trimming excess liquidity.
Recent excess liqudity in the interbank had come mainly from operating a pegged exchange rate. In a hard peg, where there is no danger of monetary instability from money printed to maintain a ceiling rate, large volumes of excess liquidity can be tolerated with little risk. The risk in a soft-peg can be cut with a wider policy corridor analysts have sad.
Shifting to longer term instruments to sterlize liquidity may clear any inconsistencies, market participants say. The apparent disconnect could mean that the market is being given less Treasury bills than it can absorb, or that the credit system can tolerate a higher levels of liquidity, or that the monetary system takes time to settle following numerous shocks, due to see-sawing between pegged and semi-floating regimes.
The central bank which also sells debt to the public on behalf the Treasury has rejected 3-month bills for two weeks running, despite a rate cut being widely expected.
A rate cut is widely expected following a collapse of the currency and slowing bank credit, which can also flatten the yeild curve.
Central Bank Governor Indrajit Coomaraswamy has said another statutory reserve ratio cut may be on the cards.
The SRR is an archaic monetary tool, that keeps interests rates chronically high, by making banks inefficient.
It is not clear why the debt office is rejecting three month bills. No data on rejected bids are available.
But analysts say it would have saved the Treasury money to borrow three months, even at the six month rate, so that debt can be rolled over at a much lower rate in three months.
It is not unusual to for yield curves to flatten or invert when there are strong expectations of falling rates.
Analysts say the debt office may have been selling more 6 and 12 months bills, because it thinks that rates have bottomed out, or that there may not be a rate cut, or that the rate cut has already been factored into the pricing. (Colombo/May30/2019)