Pressure mounts on Treasury yields again as economic woes run deeper

• CB rejects bids above the previous week levels and accepts only a third of what was offered
• It is nothing different to what was done last year until September where CB bought unsubscribed bills via printed money
• Bond investors respond after PM made explicit that Sri Lanka’s economy has totally collapsed 
• EPF becomes the lone bidder at this week’s auction to bid below last week’s yield  

Bucking the weeks-long trend, upwards pressure was seen again on Treasury yields this week as primary dealers and bond investors bid higher amid the worsening economic crisis, which has engulfed the entire country, bringing it to its knees. 

The Central Bank on Wednesday rejected bids received above the previous week levels and accepted only a third of what was offered, acting as a shield against any upward movement since the easing began five weeks ago. 
The Central Bank had earlier made clear that they wouldn’t hesitate to intervene to stabilise the market through liquidity injections. 

The Central Bank disclosed the dispersion of bids received from the primary dealers across the three maturities where the benchmark one-year bill received bids as high as 29.36 percent, although the Central Bank accepted only a fraction to maintain the yield at the previous week’s level of 22.04 percent. 

The Public Debt Department (PDD) of the Central Bank offered Rs.93.0 billion in total bills across the three maturities, but accepted only Rs.30.8 billion, with the lowest acceptance of Rs.5.1 billion made from the one-year bills at an average yield comparable with last week’s, despite the offered amount remaining at Rs.28.0 billion. 
The Central Bank appeared to be trying to send a strong message to dealers and bond investors again that they will reject anything above what they desire to see in the yields. 

However, with the situation in the economy turning murky by the day and doubts surfacing whether the Central Bank could continue to suppress the yields, Prime Minister Ranil Wickremesinghe yesterday made explicit that the Sri Lankan economy had “completely collapsed” and the International Monetary Fund bailout is the only way out. 
The practice was nothing different to what was done last year until September when the Central Bank rejected bids coming above their guidance levels offered prior to the auctions, and buying the unsubscribed bills through printed money, a process which some people called as making auctions dysfunctional. 

 Meanwhile, the Central Bank offered Rs.40.0 billion in three-months bills, but accepted only Rs.19.9 billion at a weighted average yield of 20.73 percent as the bids topped 25.20 percent. 

Under six-months bills, the Central Bank accepted only Rs.5.8 billion at 21.90 percent after offering Rs.25.0 billion as the bids received were as high as 25.20 percent. 

The Employees’ Provident Fund was the only bidder which bid below the weighted average yield at 20.60 percent under the three-month tenor. 

Under phase II of the subscriptions, the Central Bank kept the bids open till 3.30 p.m. yesterday to see if they could attract any more bids from the market at an acceptable level of weighted average yields.