Sri Lanka treasury yields rocket as central bank continues tight stance

April 17, 2007 (LBO) – Sri Lanka’s 3-month treasury yield shot up at an auction by more than 43 basis points to 15.44 percent Tuesday with overnight rates already at 30 percent levels. Sri Lanka’s central bank has been staying away from printing money in primary auctions and allowing rates to adjust upwards to draw in funds to bridge a 9.2 percent projected budget deficit this year.

Last year the bank printed 38.5 billion rupees to finance the deficit sending inflation to 20.5 percent and the rupee sliding down.

However, the bank has tightened policy rates since December and shifted to a strict quantity targeting framework to stabilize the economy.

Six months t-bill yields rose to 15.71 percent at today’s auction from 14.98 while one-year bills rose to 15.51 from 14.07. Last week one-year yields fell unexpectedly, which dealers believe, was because a low bid was put in by mistake.

Sri Lanka’s 3-month Treasury rate has become an important signal rate to the market since the central bank’s overnight discount policy rate of 12.0 percent has lost its ability to influence the market due to access restrictions.

Overnight rates in the interbank market have been fluctuating between 20 to 50 percent during the last few weeks with state-banks that fund the treasury through overdrafts generally being on the borrowing side.

However, deposits have still not started to move up. Meanwhile, the rupee traded around 109.90 Tuesday.