Sri Lanka Treasuries yields up, rupee down

Oct 24, 2012 (LBO) – Sri Lanka’s Treasuries yields rose for 6 and 12 month maturities with bids for three months securities being rejected at Wednesday’s auction, data from the state debt office showed, while the rupee weakened. The 6-month yield rose 07 basis points to 11.90 percent, and the 12-month yield rose 11 basis points to 12.48 percent.

The debt office rejected bids for 3-month bills after offering to re-issue 10.0 billion rupees of bills.

Analysts have pointed out earlier that Sri Lanka’s debt office, which is a unit of the Central Bank, usually triggers balance of payments crises by rejecting auctions wholesale and repaying maturing bills with printed money, in a bid to manipulate interest rates.

The freshly printed money then finds their way into commercial banks and creating more loans, triggering import demand and mounting speculative pressure on the island’s rupee peg.

But after rejecting bids for the three month maturity the debt office accepted 9.45 billion rupees of bids from 12-month bills and 1.14 billion rupees of bids in 6-month bills, totaling 10.6 billion rupees.

The rupee has weakened close to 130 rupee to the US dollar, after strengthening towards 128.50 levels in recent days.

On Wednesday the rupee fell to 130.15 levels.

Analysts had previously warned that printing money into the banking system through term auctions was likely to put pressure on the peg.

Two term auction injected 8.0 billion and 6.0 billion rupees into banks at 9.81 percent and 9.83 percent in two peculiar deals, far below the market one month repo rate at 11.00/50 percent.

Central Bank Governor Nivard Cabraal however that they were planning to sell down a Treasury bill stock held by the Central Bank, as it matures.

The move if carried out will tend to push up interest rates, but will also reduce credit, imports and allow the peg to strengthen.