Sri Lanka’s Ministry of Finance is in the process of lowering its long-end yield rates, as the performance of short-term T-bills extended its decline at the last auction, and the Ministry is compelled to accept bids for securities at a lesser rate, NSB Fund Management Chief Dealer Surendran Edwatd said, speaking during a Committee on Public Enterprise meeting held last week (6).
“Now, today itself the market has come down. At the last auction, even the T-bills, the short turners all dipped because the Ministry of Finance has been compelled to take at a lesser rate now, rather than increasing the cost of borrowing of the Government. Now they have reduced it and they are also in the process of reducing the rates on the long end as well,” Surendran said.
During last week’s auction, the Weighted Average Yield Rates (WAYR) for three-month tenors and six-month tenors dipped by 9 bps and 22 bps, while the 12-month tenors only reduced by 1 bp, making it the fourth consecutive week of easing for T-bill yields.
The auction was oversubscribed, with total bids received amounting to Rs 337.4 billion, exceeding the amount offered of Rs 140 billion.
Surendran’s comments were made in response to the COPE Committee’s query into why the state bank, NSB, had seemingly experienced a trading loss. “When we take the actual monthly financial statements, we observed that in July there has been a trading loss, which has ended up in a net loss. We would like to know if there is a special reason for this.”
Surendran clarified that this was a mark-to-market valuation loss, not an actual realised loss. He explained that the losses were due to the Central Bank’s 1% Overnight Policy Rate (OPR) hike in May, which caused the value of NSB’s bond holdings to turn negative amid market tensions. The impact was compounded in July, when market rates surged by nearly 75 basis points, further depressing the valuation of the bank’s securities portfolio.
“Due to that reason, the major impact was in July, where again the market rates went up by almost 75 basis points,” Surendran said. “This is the mark-to-market valuation. It’s not an actual loss, because this is getting valued at the current market rates.”
He further said as market conditions stabilise, the underlying value of the holdings are to be reflected adequately, as yields reverse. In addition to the extended decline in T-bill rates, overnight market liquidity stood at Rs 159.31 billion, reversing the shortage of Rs 40.1 billion seen in June.