Sri Lanka Treasuries yields steady

May 19, 2010 (LBO) - Sri Lanka's Treasuries yields were steady at Wednesday's auction though the 3-month yield fell 05 basis points to 8.
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13 percent, the government's debt office said.
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The 6-month yield was flat at 8.
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88 percent and the 12-month yield was also flat at 9.23 percent, the debt office which is a unit of the Central Bank said.
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The debt office said out of 13.0 billion rupees in maturing debt only 11.4 billion rupees of bids were accepted from real buyers.

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In Sri Lanka the central bank frequently prints money to buy government debt deeper along the yield curve.

But officially sanctioned policy action by its rate setting monetary board is supposedly transparently conducted in the overnight market by its domestic operations department.

Direct central bank purchases of government debt are usually conducted for near-bankrupt governments as a last resort or to fill severe liquidity shortages to allow markets to function.

The central bank did not disclose the volume of tenures of the liquidity injected into the economy.

The European Central Bank said Monday it directly bought at least 16.


5 billion Euros worth European government debt, after insisting for weeks that it would not.

The ECB indicated that it will sterilize the excess liquidity at rates up to four times as high as its overnight policy rate to mop up the liquidity.


The Euro has since plunged.

But in Sri Lanka such transactions have been routine. Reserve Bank of India's chief economist once referred to the practice as dipping into the 'cookie jar'.

From late last year Sri Lanka's central bank has frantically sterilized excess liquidity from bill purchases to contain the negative fallout on inflation.
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Analysts say the practice undermines the overnight policy rate framework of the central bank and has led to higher inflation and currency weaknesses or reserve losses in the past despite Sri Lanka having chronically higher policy rates than its anchor currency.

The Sri Lanka rupee is anchored or pegged to the US dollar.

Analysts say such an action, where the state clears one final transaction through the country's monetary base with the proceeds, is similar to a counterfeited note that is recovered and destroyed by law enforcement officials after being 'passed' once.

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