Increased market confidence pushes bond yields south

12 Jun 2022

Increased market confidence pushes bond yields south

12 Jun 2022

By Shenal Fernando Since the last monetary policy meeting on 19 May 2022, the local bond market has seen a significant improvement in performance, with the last three Treasury bill auctions being fully subscribed and the Weighted Average Yield Rate (WAYR) falling across all Treasury bill maturities in the face of increasing market confidence. Treasury bill (T-bill) yield rates have been on a downward trend since the 18 May 2022 auction where the Central Bank of Sri Lanka (CBSL) accepted less than 20% of the Rs. 135.2 billion bids received against the Rs. 90 billion offered to the market. However, speaking to The Sunday Morning Business, Economist and former Deputy Governor of CBSL Dr. W.A. Wijewardena stated that the decrease in T-bill yield rates observed at the primary auction over the past three weeks was not surprising due to the saturation of the market and that the decrease was actually marginal. Explaining further, he stated that currently there was no reason for any optimism as the current decrease was natural, considering the significant saturation of the market, and further stated that the decrease should be viewed with optimism only if it falls below 20%. He added: “A further decrease in yield rates should not be expected and the rates will continue to be at these high levels because there is a liquidity shortage of around Rs. 800 billion in the banking system. Therefore, banks will have to borrow Rs. 800 billion from the CBSL every day to fill up the liquidity gap. They won’t have money to invest in Treasury bills because they don’t have a surplus. Therefore, currently the investors in the market are not banks; instead it is individual and institutional investors.” A key development over the past three weeks is that there has been an increase in interest in the 364-day T-bills, indicative of the increased market confidence in the new management of the CBSL and their new monetary policy. Furthermore, by selling their targeted volumes during the past three auctions, the CBSL has been able to limit money printing over the past three weeks by completely re-financing its T-Bill liabilities as they come due. At the T-bill auction held on 8 June 2022, the CBSL was successful in selling Rs. 55.5 billion of three-month bills, which were sold at a WAYR of 21.91%, up 94 basis points from the previous auction. Only Rs. 12.9 billion of the offered Rs. 30 billion six-month bills were sold, at a WAYR of 22.89%, up by 71 basis points from the previous auction. Furthermore, the CBSL was successful in selling Rs. 29.6 billion of one-year bills which were sold at a WAYR of 23.13%, up by 62 basis points. However, the yield curve in the bond market continues to be inverted as the three-year and five-year Treasury bond yields continue to be lower than the one-year T-bill yield. Dr. Wijewardena stated: “This wasn’t an aberration because there appears to be a build-up of market confidence regarding the monetary policy of the CBSL and the market appears to believe that the CBSL will continue this monetary policy. As a result, the market expects that in the long run the CBSL monetary policy will be effective in curtailing inflation and thus the future inflation will be lower than the current inflation. Hence, the long-term maturity securities have a higher interest rate.”

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Increased market confidence pushes bond yields south

Increased market confidence pushes bond yields south

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