Treasury bond yields take a leap

August 21, 2006 (LBO) – Sri Lanka’s borrowing costs shot up Monday, when the Central Bank sold three and four year treasury bonds at higher yields. The bank offered 1.5 billion rupees worth of 4-year bonds and 1.0 billion rupees worth of 5-year bonds to the market, but accepted only 500 million rupees worth of bids from the market for each tenure.

Current Auction

Maturity

4-years 5-years
Coupon 7.60% 7.00%
Amount offered LKR 1.500 bn LKR 1.000 bn
Bids received LKR 2.150 bn LKR 1.649 bn
Amount accepted LKR 500 mn LKR 500 mn
Weighted average yield 11.25% 11.36%


(Source : Central Bank)

Yields for four-year debt paper climbed sharply to 11.25 percent from 11.10 percent, while five-year treasuries shot up to 11.36 percent from 11.20 percent.

Investors have to pay for the securities on August 23.

Traders said the bank may have rejected higher bids in an attempt to keep yields down, but saw the sharp increase as a signal for future trends.

Secondary market bond yields did not react to today’s announcement with four-year debt trading between 11.38-45 percent, while five-year treasuries were being quoted between 11.45-55 percent.

“The Central Bank is taking the market up on a nice pace, it’s a matter of time that primary rates will catch up with secondary yields,” a dealer at private bank said.

The Central Bank this month froze its key interest rates, after raising policy rates in June and July.

The bank’s benchmark reverse repurchase rate, used to manage liquidity and contain inflation, stays at 10.625 percent. The short-term repurchase rate at which it lends to commercial banks remains at a 3 ½ month high of 9.125 percent.

Sri Lanka’s borrowing costs have been creeping up stealthily as fierce fighting between government troops and Tamil Tiger rebels has renewed fears that the island was slipping back to civil war and left the February 2002 truce pact in tatters.