Sri Lanka overnight rates hit two year high

Nov 24, 2011 (LBO) – Sri Lanka’s overnight gilt backed repos rose as much as 8.35 percent and call rates hit a two year high of 9.25 percent Thursday, dealers said, as liquidity tightened amid defence of a dollar peg. Stocks closed 2.7 percent lower. Sentiment in Sri Lanka’s financial markets have also been hit by a law to expropriate ‘underutilized’ assets and a budget which unveiled plans to re-acquire 37,000 hectares of ‘unused’ land from listed plantations firms.

In the forward dollar market one-month premiums have moved to around 1.10 rupees from 70/80 cents before Monday dealers said.

Three month premiums have moved to around 2.20/2.40 rupees from around 1.80 levels before the budget and six month premiums have moved up to 4.50/4.70 rupee levels from 3.80 rupees earlier, dealers said.

At Wednesday’s auction, Treasuries yields increased between 44 to 91 basis points across maturities.

Bond markets have dried up amid uncertainty and liquidity shortages. Two way quotes are rare and wide. On Thursday there were quotes for a bond maturing in 2015 and 10.25/11.00 percent, dealers said.

There were offers for a 2016 bond at 10.25 but no bids, dealers said.

Update IV On Wednesday the Central Bank opened its 8.50 percent standing facility for the first time to since September 2009 to inject liquidity amid defence of a dollar peg at 113.90 rupees to the US dollar in the spot market.

The window was used during a balance of payments crisis in late 2008 and early 2009.

Markets participant borrowed 2.6 billion rupees from the window Wednesday.

The Central Bank has gradually opened its liquidity facilities since active peg defence began in the second half of 2011, starting with reverse repo auctions at 7.20 percent, moving the effective policy rate towards the upper band of its 7.00 percent to 8.50 percent policy band.

The weighted average gilt backed repo rate hit a high of 7.50 percent Wednesday with the most expensive deals done at 7.60 percent.

Thursday morning overnight gilt repos hit as high 8.35 percent.

Call rates topped 9.25 percent, levels not seen since early December 2009.

Markets have been nervous since a 3.0 percent devaluation was announced in the budget in an unusual move that took dealers by surprise.