Central Bank sees further room for bond yields to ease

• Says typically in markets, downward adjustments are slower than upward runs 

The Central Bank said there is still potential for the yields on government securities to reduce on their own.
While the downward adjustment is expected, as a result of the cumulative impact of the previous monetary policy measures taken by the monetary watchdog, these measures are likely aimed at stimulating economic activity or managing inflation.

However, uncertainties related to foreign debt restructuring may be hindering the complete realisation of this downward adjustment.
“There is still more room for the yield curve to adjust downwards. Typically, in all markets, downward adjustments (in yields) are a bit rigid than their upward adjustment,” said Central Bank Governor Dr. Nandalal Weerasinghe, in response to a question on why the yields remain still at elevated levels, at an event held to unveil the Central Bank’s medium-term policies.  

The Treasury bill auction for the second week of January saw the benchmark 12-month bill yield extending its weeks-long downward rigidity, as it held at the same level or at 12.93 percent for four weeks in a row.
Dr. Weerasinghe reiterated the Monetary Policy Board’s decision to hold off on any more policy easing after the 100-basis-point cut in November, which was to give these markets to adjust themselves downwards, as they saw more room for both the yields and lending rates to come down.
While the shorter-term tenures have somewhat responded alongside the lending rates since then, the one-year bill and other longer tenure bonds haven’t responded as they should have, analysts say.
The three-month yield has shed 102 basis points since the November cut in policy rates to 14.27 percent, the weekly average prime lending rate, the benchmark rate for short-term loans, too came down by 127 basis points to settle below 12.0 percent, last week.
In comparison, the one-year bill yield came down by only one basis point to 12.93 percent.
On Thursday (11), the Central Bank sold Rs.115.9 billion in bonds maturing in 2026, 2028 and 2030, after offering Rs.120.0 billion and Rs.45.0 billion under the first two tenures and Rs.30.0 billion under the 2030 bond.

Although the coupons of the bonds were at 9.00 percent, 10.75 percent and 11.00 percent, respectively under the three tenures, the Central Bank ended up selling them at weighted average yields of 13.83 percent, 14.21 percent and 14.22 percent, respectively.
While the Central Bank accepted the full amounts it offered from the 2026 and 2028 bonds, only Rs.25.98 billion was accepted from the 2030 bonds, perhaps reflecting the substantially higher yields it received for the longest tenure bond at the auction.