Sri Lanka bonds unmoved by lower inflation

Sept 30, 2011 (LBO) – Sri Lanka’s bond markets closed unchanged despite 12-month inflation falling to 6.4 percent from 7.0 percent a month earlier, as liquidity tightened amid defence of a dollar peg, dealers said. A widely traded bond maturing in 2015 was quoted at 8.69/72 percent Friday and 2016s were quoted at 8.80/84 percent, hardly changed from a day earlier.

“Inflation was expected to slow and may be the market had already factored it in,” a dealer said.

“Tighter liquidity is also playing a part.”

Sri Lanka’s excess liquidity has declined amid sustained peg defence amid foreign reserve losses.

The central bank has bought bills and injected liquidity to sterilize interventions and prevent rates spiking amid reserve losses. The Central Bank’s Treasury bill stock rose to 64.8 billion rupees over the month.

Excess liquidity fell to 25.9 billion rupees from 48.9 billion rupees over the same period.

The central bank is expecting inflows over the next few months.

Analysts have warned that if that does not happen, when expansionary sterilization is eventually curtailed to cut reserve losses, rates may be less easy to control.

At weekly Treasuries auctions rates have been allowed to edge up for two weeks running pushing up the unofficial 3-month ‘term auction rate’ at which interventions are sterilized to 7.15 percent from 7.11 percent two weeks ago.

Sri Lanka’s effective overnight policy rate has risen 08 basis points to 7.08 percent over the month after the Central Bank started open market auctions.

In the spot market the US dollar closed at 110.18/22 rupees.