Sri Lanka Treasuries quoted wide after yield spike; bill, bond gap narrows

ECONOMYNEXT – Sri Lanka’s bonds were quoted wide Wednesday as markets took stock of a shock spike in Treasuries auction yields this week but a gap between bills where rates were held down with money printing and bonds has narrowed.

Two-year bonds maturing on 15.08.2018 quoted at 11.25/75 percent Wednesday up from 11.10/15 percent before a bill auction on Monday where yields soared.

12-month Treasuries were quoted around 10.40/60 percent after bill auction Monday, up from 9.10/50 percent, after the weighted average yield rose to 9.90 percent, up from 9.0 percent two weeks earlier.

The 3-month yield rose 62 basis points to 8.30 percent and 6-month yield rose 80 basis points to 9.29 percent.

The cut-off yield for 12-month bills are estimated to have been as high as 10.75 percent. In Sri Lanka’ cut-off yields have not been announced since the mid-1990s and it is a pending market reform for the future.

Bids were accepted at high yields after rejecting two auctions in a row, where the government could have raised money at much lower rates.

Rejecting real bids at bill auctions and repaying them with printed money to generate balance of payments crises is a standard practice of Sri Lanka’s central bank observed in past credit and balance of payment crisis cycles.

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Rejecting bids where money could have been raised at lower rates, and then accepting higher bids later is also a trend that has been observed in the past.

It is not clear why the central bank, which acts as agent to sell bonds for the Treasury engages in such practices during every balance of payments crisis it triggers.

Bond opened with wide quotes, Wednesday morning, indicating the uncertainty among market participants. But the gap between 12 month bills, which were kept down with printed money and the 2-year bonds have now narrowed.

3-year bonds maturing on 15.09.2019 quoted at 11.70/12.25 percent up from 11.75/90 percent.

5-year bonds maturing on 01.08.2021 quoted at 12.10/50 percent up from 12.10/20 percent.

6-year bonds maturing on 01.10.2022 quoted at 12.20/60 percent up from 12.15/30 percent.

7-year bonds maturing 0n 01.09.2023 quoted at 12.20/70 percent up from 12.15/30 percent.

The debt office has called 20 billion rupee auction to sell 4, 5, 6 and 9-year bonds which will close on March 24.

Later today, bids for 3,6,12 and 24 month dollar denominated bonds will close. Though the auction is called for 150 million dollars, more could be accepted.

A deal with the International Monetary Fund to bring prudent fiscal and monetary policy is expected later this year. With rate corrections some of the most eggregrious pro-cyclical loose monetary policy have now been corrected. (Colombo/Mar23/2016).