Nov 21, 2007 (LBO) – Sri Lanka’s benchmark 3-month Treasury yields shot up 33 basis points to 16.07 percent Wednesday, ending a near month long honeymoon from a sovereign bond that made markets liquid and sent rates plummeting. Due a flaw in Sri Lanka’s monetary law the Central Bank could be used by the government to print money and intervene in the market.
Analyst say the rate rise in today’s auction indicates that the central bank is now less willing to print more money as consumpe price inflation in Colombo edges closer to 20 percent. The government’s debt office said 12-month yields went up 83 basis points to 18.07 percent while 6-month bills went up 76 basis points to 17.79 percent.
Earlier in the week the government rejected bids for a bond issue week indicating that the market was starting to demand higher yields.
In the past outright bond rejections have been later followed by even higher yields as investors shifted out of the market.
T-bills yields started to edge up last week after the government admitted that 56 billion rupees raised from a sovereign bond has been spent on repaying short term debt to commercial banks, the central bank reserves and some expenses.
Expectations that the dollar bond would ease inflationary pressure on the monetary system were dashed as liquidity from the bond flushed the system from the sudden payback of debt.
Analysts say policy rates need to be adjusted to conduct effective monetary policy as inflation cannot be countered with negative real rates either in Sri Lanka or elsewhere.