The cut-off which is the highest bid accepted by the state is estimated to have moved to almost 18.55 percent, dealers said.
The 6-month yield went up 3 basis points to 17.50 percent with only 150 million of bills being rolled over while the 12-month yield went up 5 basis points to 17.36 with just 108 million being rolled over at Wednesday's auction, the government's debt office said.
Short End
Though 12 billion in maturing bills were offered only 6 billion in bids was accepted with 5.9 billion rupees coming from the short end 3-month maturity. The government retired 5.8 billion rupees of bills.
Due to a loophole in Sri Lanka's monetary law, the central bank can be forced to print money and buy treasury bills in the primary market to keep rates low through fiscal dominance of monetary policy.
Such actions pushed inflation to 20.5 percent by January 2007 also reversed the good work done by the Central Bank up to April which brought inflation down.
However monetary policy was relaxed from May with central bank intervening with printed money and buying up treasury bills which pushed inflation up and brought the rupee under severe pressure.
The central bank treasury bill stock has had moved up to 81 billion rupees from about 30 billion in June, indicating that the state had effectively printed or appropriated foreign reserves of about 50 billion rupees since mid June.
In June the central bank's T-bill stock fell to 30 billion rupees.
Sri Lanka's 12-month inflation is now 17.3 percent and has exceeded the central banks announced targets. The moving average at 17.5 percent is at a 17-year high.
Dollar Bond
The government is now planning a 500 million dollar foreign bond which has run into controversy with the opposition saying it is illegal and has not been sanctioned by parliament.
However the finance ministry has denied the claims and said it was going ahead with the issue. The issuance, to be lead managed by HSBC, JPMorgan and Barclays Capital was also hit by uncertainty after the recent turmoil in bond markets.
Ghana went to the market with a 750 million dollar sovereign bond but had to pay a punitive 387 basis points above the US 10-year treasury yield to get the money, Dow Jones newswires said.
Sri Lanka had earlier been able to raise 2 and 3-year money even below 150 basis points above the London Interbank Offered rate.
Ghana also has a speculative B+ rating from Standard & Poor's. However the country's national debt is only 35 percent of gross domestic product the report said. This compares with 90 percent for Sri Lanka.
Sri Lanka has also been slapping new taxes to raise some money as most of the taxes are consumed by government workers.
According to official data 57 cents out of every tax rupee collected in the first five months of the year went to pay tax free salaries and pensions state workers. The government has also cut capital spending as subsidy and salary bills rose.
With Sri Lanka also unable to raise money from multilateral sources due to problems with the country's current economic policy framework, analyst say commercial sovereign bond is needed to take pressure off the domestic debt markets and maintain foreign reserves.