Sri Lanka sees first coercive bonds sales
ECONOMYNEXT – Sri Lanka has made the first coercive bond sales after an auction on September 13, under a controversial scheme announced in 2017, where the state debt office can force primary dealers to buy bonds unsold at an auction at a fixed price.
About 4 billion rupees of unsold 3-year 1-month bonds were placed on the portfolios of dealers under the so-called third stage of a bond sale.
The first stage is a voluntary multiple price auction. The debt office decides on a cut-off where a weighted average rate is decided.
On Thursday the weighted average yield was 10.03 percent, around the same rate as the 9.85/95 percent rate at which similar bonds were traded the in the secondary market.
The rate can be decided arbitrarily but the weighted average indicates that the cut-off was about 15 or 20 basis points higher than the pre-auction market, analysts say.
Dealers are then offered unsold bonds at the weighted average yield, again voluntarily.
If they are not bought voluntarily, dealers who were least successful at the auction (who bid highest) are forced to buy the bonds at the weighted average yield in the third coercive stage.
The 3-year bonds were later quoted at 10.02/10.08 percent indicating that dealers who were hit with coercive bonds would not be making a big loss.
However if the gap is high, dealers would make a loss and capital woudl be eroded.
Interest rates have been rising after the central bank triggered the second mini-run on the rupee in 2018, due to inconstant policy involving injecting billions of rupees in to money market and not defending the currency, when the printed money hit forex markets. (Colombo/Sept14/2018)