Bonded

Bond dealers are expecting the Monetary Board to cut benchmark Overnight rates next week as inflation continues to fall.
Bond traders who have been making super profits over the last few months are counting on a 0.5 percent cut in the Repo and Reverse Repo rates.rnrnWhile gains on portfolios come from falls in interest rates, some dealers say opportunities to exploit market imperfections also exist.rn

rnThe monthly monetary board rate review will happen next Friday.rn

rnThe Central Bank has already cut overnight Repo and reverse Repo rates twice this year by a total of 1.5 percent.rn

rnDealers say that a 1.5 percent cut next week and a further 1.5 percent cut towards the end of the year would be welcome.rn

rnldblquote Probably they (CB) will go with a 50 basis point at the moment. But the market at the moment has factored on 1 percent – a bit too much at the moment given the inflation figures,
dblquote says Dudeepa Ratwatte, Chief Treasury Manager, HNB.rn

rnldblquote The inflation might spike up towards the year end and probably the Central Bank would like to see that actually before cutting further,
dblquote he comments.rn

rnBond traders are a busy lot these days buying on the expectation of a rate cut.rn

rnThe high interest and expectations has shifted the yield curve for government securities by about 1 percent since the last cut in early May.rn

rnldblquote The inflation is coming down steadily. And the other reason is the anticipation that the interest rates will further come down in the next Monetary Board meeting,
dblquote says Janaka Udamulla, First Capital Markets.rn

rnEconomists say that inflation will play an important role when the Central Bank sits down on Friday to review the benchmark overnight rates.rn

rnThe widely used Colombo Consumers
quote Price Index (CCPI) has shown a clear declining trend over the last year.rn

rnThe downward trend is expected to continue.rn

rnCentral Bank says they expect inflation measured on a 12 month moving average to fall to around six percent towards the end of the year down from an earlier estimate of seven to eight percent.rn

rnThe rupee market was also unchanged as dealers held out from taking positions waiting for the Central Bank monetary policy announcement. rn

rnBut opportunities to profit from market imperfections are also emerging for bond traders who have direct access to currency markets.rn

rnldblquote You have to look for cheaper source of funding. Through the USD-LKR market you can do a swap and generate money a lot cheaper than through the money market code,
dblquote says Ratwatte.rn

rnldblquote Lot of players are using the arbitrage opportunity fund the bond book,
dblquote he says.rn

rnHowever, excess liquidity in the market is also giving breathing space to bond dealers who are banking on a rate cut.rn

rnldblquote Liquidity surplus is good and it gives a lot of confidence to players who deals in bonds. Having a surplus average trend of Rs. 10-12 bn last three to four years shows that we are not using the money properly- credit enhancing is not happening fast enough to absorb that. But things are falling in place,
dblquote says Ratwatte.rn

rnAnalysts say the good times for government bondholders will last well in to next year when they expect rates to saturate.rn

rnIt is then that the yield curve will also start to take better form according to them.rn

rnThe curve now is highly inverted with the long bonds yielding less than the overnight rates.rn

rnDealers say the sharp fall in rates had a lot to do with the inversion in the curve.rn

rnldblquote It is because the rates have come down sharply and lot of the players are buying bonds in a short term view,
dblquote Ratwatte says.rn

rnMore liquidity and trading in the longer term bonds will sort this according to market players who add that there is a lot of money to be made in the coming weeks.rn