Sri Lanka treasury yields up again

Sept 25, 2007 (LBO) – Sri Lanka’s benchmark 3- month treasury yields went up 15 basis points to 18.20 with the cut-off pushing 18.30 percent dealers said, as authorities struggled to stabilize an economy hit by heavy government spending. Meanwhile 6-month yields went up 15 basis points to 17.47 percent and the 12-month went up 16 basis points to 17.31 percent.

The auction was held a day earlier because Wednesday is a religious holiday in Sri Lanka.

The government rolled over 4.44 billion in treasuries and 2.97 billion with 5.3 billion being bought by the central bank to keep rates from going up further.

Sri Lanka’s central bank can print money in the primary treasury auction and intervene due to a flaw in the country’s monetary laws.

This facility had been mis-used by successive governments to print money, push inflation up and cause a run on the national currency.

The central bank which relaxed monetary policy in May has now tightened policy again after the currency came under pressure from excessive money printing and inflation spiked above 17 percent in July.

The bank’s Treasury bill portfolio this week hit a record 80 billion rupees indicating a rise in central bank credit to government.

But analysts say the bank is trying to avoid subscribing to primary auctions as much as possible and allowing the rates to go up to a level that is demanded by the budget deficit in order to keep the rupee stable and inflation from going up further.

In forex markets the spot dollar was firm with quotes around 113.48/50 rupees with active selling by exporters.

The 6-month forward which is priced at around 121.45 on technicals edged slightly lower to 121.25 on exporter sales, dealers said.

Money markets were somewhat tight with small names borrowing at 23 percent to cover positions earlier in the day.