Authorities observe renewed foreign interest in rupee treasuries

• 21% increase in foreign holdings in G-Secs last week 
• Authorities identify this area for promotion as short term rates topped 30%   
• Current yields considered as reasonably high even after factoring in elevated Fx risk
•  But, future trajectory remains uncertain amid rising US yields and dollar   

The Central Bank has seen some renewed interest in the investments in rupee treasuries by foreigners lately, buoyed by the soaring interest rates, although it remains uncertain how long it will last as the Sri Lankan economy tank by the day. 

There have been (some) inquiries. Although there hasn’t been a significant improvement in their holdings, there have been some inflows there,” said Central Bank Governor Dr. Nandalal Weerasinghe last week.  
This phenomenon was also underscored by the recent notable increase seen in Treasury bills and bonds held by foreigners. 

For instance, in the week ended on July 06, Treasury bills and bond stock held by foreigners rose by some robust 21.01 percent over the previous week to Rs. 4.44 billion.

It appears that some foreigners have even been willing to overlook the huge foreign exchange risk that such instruments carry.

“Obviously there is an opportunity for anyone who wants to have their positions with their expectations,” said Dr. Weerasinghe.   

“If someone brings dollars and converts into rupees at this exchange rate and invests that in say, at 20 percent, in my view that’s a very reasonable return even after you factor the risk on the currency,” he said.

Foreign holdings of the rupee bonds fell off a cliff since January 2015 and never recovered thereafter as investors who grew extremely jittery about the Sri Lankan economy continued to cut their positions they had in rupee treasuries. 

At its peak in January 2015, foreigners held Rs.453 billion worth rupee bonds which at the time was equivalent to US$ 3.5 billion. 

Various attempts such as the one brought in September 2020 where the government offered to assume the foreign currency risk of those who wanted to invest in rupee bonds via swaps up to two years didn’t help to reverse the decline as foreigners continued to lose their confidence in the Sri Lankan economy. 

However Dr. Weerasinghe considers that this could be an area they could promote given the elevated yields of treasuries. 

There have also been some proposals by the Sri Lankans living abroad to this effect. 

“I think this is one thing we should promote further,” he said. 

However, with the faster rise in the US treasury yields and the strengthening of the US dollar against other currencies, it is unlikely that Sri Lanka’s yields would remain attractive to foreigners specially at a time when the country has defaulted on most of its foreign currency loans and is scrambling to find dollars to import even its basic needs.