- Investor uncertainty mounts
Tightening market liquidity, escalating uncertainty over the resolution of the Middle East crisis, and the sharp depreciation of the Sri Lankan Rupee saw yields on Government securities in the primary market edge upwards during the preceding week.
The upward adjustment in yields observed at last week’s Treasury bill (T-bill) auction was likely a reaction to the tightening liquidity conditions in the market, compounded by mounting investor uncertainty stemming from the protracted Middle East crisis and the accelerating depreciation of the rupee.
According to statistics published by the Central Bank of Sri Lanka (CBSL), market liquidity declined sharply to Rs. 181.68 billion by 19 May, down from Rs. 262.96 billion on 11 May.
Additionally, the absence of clarity on when the ongoing Middle East conflict might be resolved has continued to weigh on sentiment in the domestic debt market, with investors demanding higher yields to compensate for the elevated risk environment.
The pressure has been further amplified by the rupee’s recent slide, which has added to inflationary concerns and reinforced expectations of tighter financial conditions in the period ahead.
This uncertainty saw the bids coming in on the higher end at the T-bill auction last week, above the cutoff mark, leading to lower acceptance rates.
Data released by the Public Debt Management Office (PDMO) further showed that bids totalling Rs. 232.3 billion were received at the T-bill auction held on Wednesday (20) against Rs. 140 billion on offer, amounting to an oversubscription of 65.9%. However, the PDMO accepted bids only for a total of Rs. 67.2 billion.
At the auction, Rs. 46.1 billion was accepted out of Rs. 131.7 billion in bids received for three-month bills at a Weighted Average Yield Rate (WAYR) of 8.18%, up by 5 basis points from the previous auction.
Similarly, Rs. 16.4 billion was accepted out of Rs. 55.5 billion in bids for six-month bills at a WAYR of 8.25%, up by 2 basis points from the previous auction.
Meanwhile, Rs. 4.7 billion was accepted out of Rs. 45.1 billion in bids for 12-month bills at a WAYR of 8.49%, unchanged from the previous auction.