Sri Lanka treasury bill yields leap forward as central bank baulks at printing money

January, 30 (LBO) – Government securities vaulted up at Tuesday’s auction, with cut off rates for one year treasury bills touching 14.5 percent, dealers said. The weighted average yield at Tuesday’s auction for all maturities climbed up 31 basis points to 13.80 percent.

“The rates are now reflecting the true state of the market,” says Ajith Fernando of Capital Alliance.

“For monetary policy to be effective the transmission mechanism must be allowed to function.”

One year t-bill yields averaged 13.58 percent, up 32 basis points from last week, six months up 24 basis points and one year up 32 basis points, with central bank resolutely holding back from printing money to buy up treasury bills.

Meanwhile cut-off rates for T-bills moved towards 14.5 percent for one-year, to 14.25 percent for six months and 13.8 percent for three months.

The government offered 12.8 billion in T-bills to the market, accepted 6.7 billion and retired 6.1 billion.

At last month’s monetary policy meeting, the Central Bank stayed away from raising policy rates to the surprise of most analysts.

Meanwhile market rates along the yield curve have started to swing upwards with several measures in force squeeze out banks from the liquidity window of the monetary authority.

At the beginning of every year the Central is obliged to print money and advance up to ten percent of estimated government revenue to the treasury under Sri Lankan law.

But the monetary authority has pledged to limit provisional advances to 12 billion rupees and not print money to buy new T-bills in 2007, after inflation rose to 19.3 percent in December following massive money printing last year.