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Sri Lanka sells lower than offered bonds; forced dump rule not used

ECONOMYNEXT – Sri Lanka has sold 32 billion rupees of 3 and 7 year bonds, lower than the 40 billion rupees offered, at rates around the secondary market, but a draconian forced dump provision was not used, data from the state debt office showed.

The debt office sold 17.02 billion rupees of 3-year bonds maturing on 01.03.2021 at an average yield of 9.85 percent, lower than the 25 billion rupees offered.

The 2021 bond was quoted around 9.80/90 percent before the auction had was quoted around 9.85/90 after, dealers said.

The debt office also sold 15 billion rupees of 7-year bonds maturing on 01.08.2025 at a weighted average yield of 10.34 percent.

The cut-off yield is kept secret.

It was quoted around 10.10/25 levels before the auction.

Analysts suspected in the morning that the central bank may deploy a draconian provision of forcibly dumping bonds on dealers at high prices (lower rates) when rates move higher than bureaucrats want.

"The new system works fine after a balance of payments crisis, when rates move down," EN’s economic analyst, Bellwether says.

"But the problem happens when rates are on an upward cycle."

The central bank revised its bond auctions last year, after a previous method of manipulating auctions by misleading market participants led to corruption.





Under the new system if more than 60 percent of the bids are accepted (driving the weighted average yield higher) dealers are offered bonds at the weighted average yield.

If there are no voluntary takers the bonds are forcibly dumped at on dealers, some of whom can go bankrupt if the secondary market goes sharply against them.

In the first round only 14,720 billion rupees of 3-year bonds were accepted, making way for the second round, dealers said. In the second voluntary 2.2 billion rupees of bonds were taken at the weighted average yield, dealers said.

However the forced dump provision was not used because the total accepted was below 60 percent in the first round market participants said.

The central bank’s debt office has a long history of financial repression. (Colombo/Feb26/2018 – corrected Rs32bn)

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