Sri lanka News- Sri Lanka’s bond markets were foxed after the state debt office rejected bids for 3-year bonds at yields over 31/32 percent but accepted up to 35 percent for 7 year bonds, market participants said.
The debt office said 15 July 2029 bonds 7 – year bonds were sold at a weighted average yield of 26.51 percent. But bids of around 35 percent were accepted market participants taking the estimated cut-off to a sharply higher level.
In Sri Lanka the debt office does not publish the cut-off. The practice was stopped in the 1990s for reasons that are not clear. The lowest yield bond are expected to have been sold to the capital sources such as provident funds.
At the same auction bids for 01 June 2025 bonds at around 31 to 32 percent were rejected, official released data show. According to market participants bond around 30 percent were also rejected.
Seven year bonds were offered around 31 percent shortly after the auction.
While selling bonds to real investors instead of printing money will help reduce forex shortages and allow fuel and other items to be imported freely, the market is puzzled why more from the shorter tenor bonds were not accepted, at a time when the yield curve had been flattening or inverting.
As late as June 22 the central bank rejected up to 63 billion rupees of bids for a 93 billion rupee bill auction and printed money to price-control the 3-month bills at 20.73 percent, the 6-month at 21.90 percent and 12-month at 22.04 percent at the previous week’s level.
By July 06, T-bills had hit 28 percent.
Sri Lanka has a bond auction committee, involving the central which engages in un-announced ‘quantity easing’ using central bank independence trying to control interest rates along the yield curve and eventually drive rates to high levels and also depreciate the currency.
The central bank also has a view on interest rates as well as the exchange rate (flexible exchange rate), eventually triggering currency crises.
When the central bank breaks the country’s unstable non-credible peg triggering a currency crisis, interest rates tend to move up until monetary stability is restored with a working regime following a float. (Colombo/July12/2022)