Dec 03, 2009 (LBO) – Sri Lanka Treasury bill yields have started to move up across the board, at Wednesday’s auction the government debt office said, as private sector credit demand picked up and inflation concerns re-emerged. The 3-month yield rose 15 basis points to 7.40 percent, the 6-month yield rose 09 basis points to 8.42 percent and the 12-month yield rose 09 basis points to 9.26 percent.
The 3-month yield however is now just under the Central Bank’s repo rate of 7.50 percent, amid excess liquidity in the market.
Interest rates in an economy need to match credit demand. If a central bank injects paper money reserves into the banking system to keep rates down, it creates an imbalance between savings and credit eventually leading to an economic bubble that bursts.
Sri Lanka’s interbank markets have seen a flood of liquidity as loose monetary policy of the US Federal Reserve was ‘imported’ through a dollar peg, after confidence in the currency anchor was restored in March with a float.
Sri Lanka’s reverse repo rate is still at 9.75 percent allowing market rates to adjust without a specific rate increase from the central bank. September Central Bank data showed that private sector loan demand had picked up, ending eight months of contraction.
People’s Leasing, Sri Lanka’s largest leasing firm said it had also seen a 15 percent increase in monthly lease disbursements.
Government bond yields however started to move up before bonds, from around the second week of November. Medium term bond yields which fell to single digit levels are now around 11.00 percent.
Fiscal policy had also deteriorated amid election spending.