Sri Lanka bond yields plunge

Sept 22, 2012 (LBO) – Sri Lanka’s bond yields plunged across maturities Friday in one of the biggest intra-day day falls seeen in recent years, before profit taking pushed yields back up somewhat, dealers said. An 18-month bond maturing on 01.04.2014 opened at 3.45/50 percent and dropped as low as 12.90/13.00 percent before closing at percent levels.

A 3-year 15.07.2015 bond opened at 13.65/75 percent, dropped to 13.05/15 percent levels and rose to close at 13.25/35 percent, dealers said.

A 4-year bond maturing on 01.04.3016 opened around 13.80/90 percent dropped to an intra-day low of 13.30/40 and closed at 13.45/55 percent levels.

A 5-year 15.06.2017 bond opened at 14.15/20 percent dropped to 13.60/65 and closed at 13.70/80 percent.

A 6-year 15.08.21018 bond opened at 14.30/35 percent dropped to 13.85/95 percent and closed at 13.90/14.00 sharp, dealers said.

“It is the most excitement the bond markets have seen in recent memory,” a dealer said.

Sri Lanka’s economy went off track from mid 2011 when the state manipulated energy prices with large volumes of bank credit and lost petroleum based tax revenues and central bank credit (printed money) was used to keep interest rates down.

Sri Lanka’s rupee plunged to 110 to 134 due money printed to sterilize liquidity shortages stemming from foreign exchange sales. However from February 2012, energy prices and interest rates were raised and foreign exchange sales gradually reduced.

On Friday however money markets were short and the central bank injected 13.4 billion rupees overnight to cover a liquidity shortage which pointed to an outflow of forex.

As long as only overnight liquidity is provided, the affected banks would be forced to curtail lending until short positions are covered with new deposits or loan repayments.

Analysts say balance of payments pressure mounts when liquidity shortages are permanently sterilized with outright purchases of Treasury bills by the monetary authority.

The Central Bank’s Treasury bill stock rose to 220 billion rupees on Friday from 206 billion rupees on Wednesday.

Sri Lanka’s fiscal picture has improved with more money being collected from citizens to pay for state spending. In the month on June, the most recent month that data is available, shows a sharp improvement in the current account of the budget.

At the September monetary policy meeting the Central Bank kept its reverse repo rate, at which money is injected to the market at 9.75 percent, giving confidence that it was serious about controlling inflation.

In August 12-month inflation eased slightly to 9.5 percent from 9.80 percent a month earlier.

Though absolute credit demand is the key driver of rates, paradoxically, a central bank that does not hastily cut rates, can trigger a fall in long term yields as investors expect future inflation to be lower.

Correction 01.04.2014 bond closing 13.15/35 percent