Sri Lanka’s Central Bank rejects high bond auction bids

Sri Lanka’s Central Bank rejected bids for eight-year bonds on Tuesday, as the market put in high yields on speculations that interest rates would rise. Sri Lanka’s Central Bank rejected bids for eight-year bonds on Tuesday, as the market put in high yields on speculations that interest rates would rise. Monetary Board member Deva Rodrigo said last week that interest rates would have to rise in the face of loose fiscal policy.


Maturity


Oct 2007 


July 2013

Coupon                 

11.75%      

8.5%

Amount Offered      

Rs. 2.500 bn  

Rs.  500 mn

Bids Received        

Rs. 3.105 bn  

Rs. 1.030 bn

Amount Accepted       

Rs. 550 mn    

    –

Weighted Avg Yield     

10.34%      

  –

Addressing members of the Ceylon Chamber of Commerce annual sessions where he was re-elected as Chairman, Rodrigo said that: “At the moment I don’t see any other solution than pushing up the interest rates. Because, if the interest rates are not raised at this level of inflation, our rupee will depreciate. You can’t hold keep the rupee depreciation and interest rates down together when there is a huge budget deficit”.

“Most players took cue from Mr. Rodrigo’s remarks at put in high bids. But Central Bank thinks differently, they feel that long term yields should come down,” said a said a trader.

The Central Bank last sold eight year bonds at yields of 10.58 percent on July 1.

However, the bank sold off bonds maturing in October 2007 at a yield 10.34 percent, a little higher than the previous week’s auction of 10.32 percent, the bank said Tuesday.

“It looks like the state controlled pension funds subscribed to the issue (maturing in 2007). Its unlikely that any bids from the market would have been accepted as the yields quoted were too high,” a trader said.

Two and three year bond paper is currently trading at a yield between 10.60-70 percent.

Meanwhile, the market were also surprised in recent days when state-owned dealers suddenly sold bonds which are suspected to have been acquired through private placements.

Central Bank’s next monetary policy announcement is due on Friday July 15.

-LBO Newsdesk: LBOEmail@vanguardlk.com