Sri Lanka gilt yield curve develops new kink

Nov 26, 2012 (LBO) – A new kink has developed in Sri Lanka’s government bond yield curve with the five year bond rates falling below the four and six year yields during November, dealers said. Sri Lanka usually represses Treasury bill yields when credit demand expands, preventing the banking system and the economy from adjusting by increasing savings and reducing consumption, which helps keep an exchange rate peg stable.

Sri Lanka’s 4-year bond maturing on August 01, 2016 are quoted around 12.60/80 percent in the secondary markets but the five year bond yields lower at around 12.38/45 percent.

Bu the 6-year bond is again quoted higher to yield around 12.90/13.00 percent.

Dealers say some foreign buyers may be collecting the specific 5-year maturity.

Sri Lanka gilt yield curve was anyway downward sloping after one year, indicating that market participants expected rates to fall with inflation and state finances improving.

The 12-month weighted average Treasury bill yield at auctions was 12.71 percent, higher than the 3-year bond yield of 12.40/50 percent.

The 3-month auction yield was 10.74 percent and the 6-month 12.07 percent with the curve being upward sloping up to 12-month.

All things being equal, longer yields tend to be higher in normal circumstances, as default risk increases with time.

Other anomalies have also crept into the interest rates.

Sri Lanka’s central bank has been injecting money into banks through term auction at around 150 to 200 basis points below market rates, at around 9.80 percent levels, pressuring bank dealers to bid low when market repos were quoted around 11.00/50 percent, dealer said.

Though market participants are used to being under pressure by authorities when they are bidding at Treasury bill auctions (when the state is buying money), to come under pressure when the state is selling money was a new twist in Sri Lanka’s history of rate manipulation.

Amused market participants were happy to get money at 9.80 percent and lend at 11.00/50 percent.

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