Dec 06, 2007 (LBO) – The Sri Lanka rupee extended gains against the greenback Thursday as panicky exporters sold dollars fearing more ‘carry trade’ style activity from hedge funds, dealers said, after authorities relaxed foreign investor limits on local bonds. Sri Lanka government securities offer attractive rates of around 19.00 percent a year for macro hedge funds that arbitrage across economies by borrowing from low interest countries and buying high-yield bonds in countries with tighter monetary policy.
The rout of the greenback in Colombo was triggered Wednesday after foreign names dumped dollars in the market, with dealers believing the hedge funds were buying into government bonds of just over 12 months maturity.
Last year hedge funds bough more than 400 million dollars worth Sri Lanka five year bonds at around 14.00 percent. Though the bond is now quoted 17.50/18.00 percent, the yield is high enough to cover losses.
In another development, one year Treasury bill yields moved to 19.96 percent at the weekly auction yesterday amidst a strengthening domestic currency.
The spot dollar which opened at 110.30/40 rupee levels on Wednesday was around 108.30/40 levels in mid – morning trade Thursday.