Uncertainty weighs on Sri Lanka’s money, bond markets; yields up

ECONOMYNEXT – Sri Lanka’s bond yields rose from a week earlier, and were quoted wider with uncertainty over tax changes in overnight money markets, where clean rates have been lower than collateralised rates for some time.

In Sri Lanka, collateralised repurchase rates (overnight deals backed by Treasuries) have been higher than clean call money for some time.

On Monday, repurchase deals were quoted at 8.50/65 percent levels, while clean money was quoted at 8.40 percent amid moral suasion by authorities not to quote higher, dealers said.

In theory, based on credit risk alone, call rates should be higher than gilt-backed trades. At the moment, there is a notional tax credit on gilt-backed deals.

Last week, bankers and dealers were informed that the Central Bank was considering treating both markets equally, where options included taking off the notional tax credit from repo deals, introducing one to call money.

However, one of the reasons call money does not move above 8.40 percent is due to moral suasion by the authorities, dealers say.

Overnight call deals are among banks and subject to strict counterparty risk limits.

Repo deals are traded widely among market participants, including primary dealers.

Risk perceptions are also higher following a securities scam at Entrust Securities, some dealers say.

Bond yields were also higher and quotes were also wider from last week, reflecting greater uncertainty, dealers said. Fewer dealers were also quoting, market participants said.

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The markets was also somewhat shaken by an apparently leaked probe over the deals made by a controversial dealer and other counterparties, dealers said.

On Monday, two-year bonds maturing on 15.11.2018 were quoted at 10.65/85 percent up from 10.35/45 percent levels last week.

Five-year bonds maturing on 01.03.2021 were quoted at 11.20/35 percent up from 10.90/11.00 percent.

Eight-year bonds maturing on 01.08.2024 were quoted at 11.50/70 percent up from 11.20/25 percent.

10-year bonds maturing on 01.08.2026 were quoted 11.65/75 percent up from 11.27/32 percent levels a week earlier. (Colombo/Oct10/2016)

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