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Wednesday October 5th, 2022

Sri Lanka sells 16.8bn in bonds, yields up, post-auction tap open

ECONOMYNEXT – Sri Lanka has sold 16.8 billion rupees in 2023 and 2030 bonds after offering 20 billion rupees allowing yields to go up, potentially drawing more funds to bonds, and a tap has been opened for post auction bids.

Sri Lanka is in the midst of an economic crisis and is heading for social unrest after the central bank suppressed interest rates price controls, printed the biggest volumes of money in the country’s history and created the worst balance of payments crisis.

6.8 billion rupees of 2023 bonds were sold at 8.12 percent after offering 10 billion rupees.

Before the auction 2023 bonds were trading at 7.75/8.0 percent.

10 billion rupees of 2030 bonds were sold at 10.23 percent.

Before auction 2030 bonds were quoted wide at 10.00/60 percent but there was hardly any trading.

On September 13, 2031 bonds were sold at 10.05 percent.

The bonds will be available on tap until 1600h on September 30 at the weighted average yield of each maturity up to 20 percent of the offered amount.

Sri Lanka’s bond markets became progressively crippled over the past several months as price controls and central bank purchases created an unrealistic yield curve out of line with the budget deficit and overall domestic credit.

Newly appointed Central Bank Governor Nivard Cabraal removed price controls on bonds taking the first steps to arrest an economic and foreign exchange crisis.

However on Monday the central bank issued a statement touting the supposed benefits of foreign exchange surrenders, a remedy also pursued by third world unstable central banks and the Reserve Bank of Zimbabwe earlier this year.

Sri Lanka started actively suppressing bond and bill yields with printed money in the last few years through multiple strategies.

A so-called ‘Stage III’ auction was set up where undersubscribed bonds were forced on dealers without any under-writing fee.

The framework was apparently developed by the US consultant whose own country does not pursue such controls but has a single price auction.

The central bank also jettisoned a ‘bills only’ policy and started buying up bonds into its balance sheet, monetizing past deficits, especially in 2018, undermining the actions of the then Finance Minister Mangala Samaraweera who brought down the deficit with unpopular tax hikes and market priced fuel.

Other strategies to suppress interest rates and trigger currency crises included a so-called buffer strategy where maturing government securities were repaid with bank overdrafts re-finances with central bank window money, effectively a sterilized reserve short.

The reason classical economists generally encourage bonds to be sold to ‘non-bank’ buyers is because commercial banks have access to central bank window money.

Central bank after World War II tried to boost ‘aggregate demand’ buy printing money mainly due to old theories resurrected at Cambridge (John Maynard Keynes) and Harvard (Alvin Hansen) Universities among others.

The world is in the grip of another commodity bubble with the Fed and several global central banks printing money.

“It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized,” explained Nobelist Friederich von Hayek.

“He had attempted by a succession of new theories to justify the same, superficially persuasive, intuitive belief that had been held by many practical men before, but that will not withstand rigorous analysis of the price mechanism.”

“The volume of employment depends on the correspondence of demand and supply in each sector of the economy and therefore the wage structure and the distribution of demand between sectors.

“The consequence is that over a longer period, the Keynesian remedy does not cure unemployment but makes it worse.

“The claim of an eminent public figure and brilliant polemicist to provide a cheap and easy means of permanently preventing serious unemployment conquered public opinion, and, after his death, professional opinion too.”

Based on such thinking Sri Lanka pursued output gap targeting up to 2019 and ‘modern monetary theory’ from 2020.

The International Monetary Fund gave technical assistance to Sri Lanka to calculate an output gap, print money for ‘go’ stimulus, trigger external instability, miss their own forex reserve targets, create an output shock with the inevitable ‘stop’ drive national debt up. (Colombo/Sept28/2021)

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