- Sharp decline in market liquidity
- Fall due to CBSL preventing yields from surging amid market panic
The Public Debt Management Office (PDMO) accepted bids for only around 51.2% of the Treasury bills (T-bills) it offered at the auction held on Wednesday (10) amid a sharp fall in market liquidity, as it sought to prevent yields from surging in the midst of the prevailing market panic.
While the upward movement of yields in the primary market was less extravagant at last week’s auction, it reflects the fact that the PDMO accepted bids for only around half of the T-bills it was offering.
According to data published by the PDMO, bids totalling Rs. 201 billion were received against Rs. 140 billion on offer. The PDMO accepted bids worth Rs. 71.7 billion, leaving around 48.8% of the offered stock unsold.
The yield movement was more contained than in recent weeks. The three-month T-bill rose by 25 basis points to a Weighted Average Yield Rate (WAYR) of 10.09%, the six-month by 26 basis points to 10.27%, and the 12-month by 14 basis points to 10.16%.
The current volatility in the market is the result of the market panic that had precipitated following the 100 basis point increase in policy rates introduced by the Central Bank of Sri Lanka (CBSL) last month.
Certain experts are of the view that the CBSL had overreacted by bringing in a 100-basis-point increase in policy rates, adding that the currency would have eventually settled. They have further noted that it would take some time for the market to settle under the present conditions.
The relative moderation seen last week follows two consecutive weeks of sharp increases.
The previous week, the three-month T-bill rose by 48 basis points to a WAYR of 9.84%, the six-month by 33 basis points to 10.01%, and the 12-month by 19 basis points to 10.02%.
The week prior, the three-month T-bill rose by 118 basis points, the six-month by 143 basis points, and the 12-month by 134 basis points.
According to statistics published by the CBSL, market liquidity had fallen drastically to Rs. 59.2 billion by Tuesday (9), down from Rs. 181.68 billion on 19 May.
Bids worth Rs. 56.6 billion were accepted out of Rs. 104 billion received for three-month bills against Rs. 65 billion on offer at a WAYR of 10.09%, up by 25 basis points from the previous auction.
By contrast, only Rs. 8.9 billion was accepted out of Rs. 69.1 billion in bids for six-month bills against Rs. 55 billion on offer at a WAYR of 10.27%, up by 26 basis points from the previous auction.
Meanwhile, Rs. 6.2 billion was accepted out of Rs. 27.9 billion in bids for 12-month bills against Rs. 20 billion on offer at a WAYR of 10.16%, up by 14 basis points from the previous auction.
The figures point to the PDMO absorbing the bulk of demand at the short end while rejecting the greater part of the bids received for the longer maturities, in an apparent effort to prevent the high borrowing costs from spreading over a longer period of time.