Bill yields advance once again signalling capitulation by Central Bank

The Treasury bill rates rose across the board yesterday after five weeks of stabilising, signalling capitulation by the Central Bank after trying hard to defend the indefensible last week, as the conditions turned dourer in the moribund Sri Lankan economy after limited fuel stocks ran dry late last week.

The yields rose by between 180 basis points to 312 basis points at the weekly bill auction held yesterday, giving up most of the declines in the yields, which started since their recent peaks reached on May 11. 

The most popular three-month bill yield advanced 3.12 percent yesterday to 23.85 percent while the six-month bill added 2.50 percent to 24.40 percent and the benchmark one-year bill rate climbed 1.80 percent to 23.84 percent. 
It isn’t clear if what was seen yesterday was the beginning of yet another stretch of rising yields, which acts as the leading indicator for the lending markets. 

In what was a forerunner for this week’s Treasury bill auction, the banks started raising their lending rates again last week in what appeared as the second round of adjustments in their lending rates.  

Meanwhile, the banks are also seeing some deceleration in the deposits coming as of late, as the people and businesses are seeing their cash flows getting tighter when the runaway prices squeezed their real incomes and margins the most. 

This may add additional pressure on the banks’ liquidity levels, in turn leaving less money to be loaned to the government by way of Treasury bills and bonds. 

Prime Minister Ranil Wickremesinghe yesterday said any more money printing would have to stop, starting from early next year, to prevent adding more to the red-hot inflation, which sent lives of millions upside down since March this year, as two-thirds of the population is now estimated to be struggling to make their ends meet, with official prices rising close to 50 percent in May. 

The Central Bank issued Rs.77.5 billion in bills yesterday but accepted up to Rs.71.2 billion, keeping open the subscriptions through Thursday evening for the interested parties to invest at the weighted average yield rates determined at the auction. 

This is the second auction in a row that the Central Bank accepted less than what it offered. 

Reflecting the pressure mounting again on the yields, there were bids up to a high of 31.38 percent for the six-month bill and up to 29.80 percent for the one-year bill, which showed an increase from the upper range seen in the bids last week.