Sri Lanka’s one-year treasury yield at 12.03%

October 25, 2006 (LBO) – Sri Lanka’s borrowing costs continued to climb up following Wednesday’s weekly treasury bill auction, with market players anticipating a further hike in policy rates next month, traders said. Yields on all maturities went up with the central bank refraining from printing money to keep rates down.

Yields for three month treasuries were up 6 basis points to 11.93 percent, six months gained 13 basis points to 12.02 percent, while one-year paper advanced 7 basis points to 12.03 percent, the central bank said.

The bank offered 13.4 billion rupees worth of bills to the market, but accepted only 9.5 billion rupees in T-bills and retired the balance without printing money to take up the balance.

The central bank’s practice of printing money and taking up treasury issues has come under fire from critics as it increases inflation and puts pressure on the balance of payments.

During the last two years, Treasury bill rates have been fixed around the short term policy rates in a bid to keep down government borrowing costs, a policy that has gradually been relaxed as inflation started to rocket up.

Treasury bill yields have steadily climbed over 1.2 percent during the past two weeks, and now trade above central bank’s policy rates.

Central bank’s repurchase or repo rate now stands at 9.625 percent, while the reverse repurchase rate is kept at 11.125 percent.

Over the last few months, the bank has raised policy rates by 87.5 basis points to curb credit demand and stamp out inflation. Secondary bond yields were mostly centered around shorter maturities, amidst thin trade, with the benchmark three-year yield trading at 13.00 percent as investors were tracking interest rate outlook, dealers said.