• T-bill auctions undersubscribed
• 6-month, 12-month T-bill yields sold at 7.91%, 8.03%
• T-bill yields decline at faster pace than T-bond yields

Acceptance at last week’s Treasury bill (T-bill) auction remained low, as the Central Bank of Sri Lanka (CBSL) continued to insist on maintaining yields at their current levels.

Speaking to The Sunday Morning Business, First Capital Manager Research Ranjan Ranatunga pointed out that recent T-bill auctions had been undersubscribed because the bids received had been on the higher side, above the levels the CBSL was willing to accept. 

Since the CBSL currently has a buffer of around Rs. 1 billion, there is no pressure on it to accommodate these higher bids.

According to Ranatunga, one of the contributing factors for high bids is the low liquidity resulting from the higher demand for loans. 

He further stated: “On the other hand, we are not seeing significant improvement in economic indicators. For example, if you consider foreign reserves, it peaked at around $ 6.5 billion in March this year and has since dropped to around  $ 6.2 billion. 

“If you consider private sector debt, it is expanding fast. Also, if you look at foreign investors, they are still not participating particularly heavily in the Government securities market. As a result, external demand is not coming in either.”

The T-bill auction on Wednesday (26) saw the CBSL receive Rs. 124.2 billion worth of bids for the Rs. 86.5 billion-worth T-bills on offer.

At the auction, Rs. 6 billion of three-month bills had been sold at a Weighted Average Yield Rate (WAYR) of 7.52%, identical to the previous auction.

Similarly, Rs. 42.7 billion from the received bids of Rs. 70.6 billion for the six-month bills had been accepted by the CBSL at a WAYR of 7.91%, identical to the previous auction.

Furthermore, Rs. 6.9 billion of 12-month bills had been sold at a WAYR of 8.03%, identical to the previous auction.

However, the Treasury bond (T-bond) issuance held on Thursday (27) saw a considerably stronger level of acceptance compared to the recent T-bill auction. 

The CBSL accepted Rs. 17.4 billion out of the Rs. 48.6 billion in bids received for the Rs. 20 billion-worth 2030 T-bonds on offer. It also successfully sold the full Rs. 22 billion of the 2033 T-bonds on offer, against bids amounting to Rs. 70.5 billion.

Commenting on the disparity in acceptance levels between the T-bond issuance and the T-bill auction, Ranatunga noted that T-bill yields had declined at a faster pace than T-bond yields. As a result, the market believes that the short end of the yield curve needs to be adjusted upwards.

However, the CBSL does not appear to share this view. From the bank’s perspective, allowing yields to rise would send a negative signal to the market. 

The Central Bank maintains that current yields are appropriate, particularly given that the country is recording a primary surplus, a point that the market, in its view, is failing to acknowledge.

– By Shenal Fernando