Sri Lanka bond markets tight amid foreign selling

Oct 05, 2008 (LBO) – Sri Lanka sold 2-year bonds maturing in September
2010 in an auction Tuesday at an average of 20.43 percent, a day after bonds maturing in April 2010 were traded at 22.00 percent amid foreign selling, dealers said. The September 2010 bond was last auctioned also at 20.34 percent on October 30, but it was trading in the secondary market at 20.90/21.25 percent, dealers said.

The government’s debt office sold 227 million rupees of the September 2010 bonds and rejected bids for another maturity at the same auction.

A bond maturing in April 2010, one of the bonds previously bought by foreign holders, was sold at 22.00 percent Monday, with quotes at 21.75/22.00 a day later, dealers said.

Forex markets were quiet Tuesday with the green back at 110.00 rupees needing minimal intervention, dealers said. Central Banks holding of treasury bills, an indirect indicator of dollar sales was at 88.6 billion rupees, against 89.5 billion rupees a day earlier.

On October 24, Central Bank Governor Nivard Cabraal said about 200 million dollars that came into rupee bonds had already left the country, and about 400 million dollars remained, of which another 200 million dollars would also go.

Dealers estimate that more than 100 million dollars of foreign hot money had left the country over the past few days, pushing the outstanding bond stock to around 30 billion rupees or lower.

With the central bank maintaining a dollar peg at 110 US dollars, the foreign exchange risk of foreign bond holders have been effectively underwritten by the monetary authority giving them ample opportunity to leave the country before another fall of the local currency.

Dealers say bond holders who get out now could come back later after a fall in the currency, at a profit.

But exporters have been unwilling to let go of their dollars at current rates, and foreign bond holders are now betting against the central bank instead, which had become the largest supplier of foreign exchange to the market in recent weeks.

The central bank has responded by slapping penal interest rates on exporter packing credit to force them to let of their dollars.

Sri Lanka’s reserves have fallen more than 800 million dollars over the past two months, with the central bank forced to shell out dollars for both foreign bondholders and local importers.

Local importers have also been slapped with 100 percent deposit margins on imports of consumer durables and other items.

Meanwhile trading in a bond maturing in April 2012, which is popular among foreign funds, was somewhat muted with quotes at 20.25/50 percent, dealers said.

A bond maturing in 2013 has been traded around 19.75/20.00 levels, dealers said.

Overnight call money rates were at 18.00 to 19.00 percent levels with an intra day high of 20.00 percent after the central bank limited access to a 12.00 percent discount window that gave super profits to some market players.