Easing long-term yields reflect rebounding economy

The fact that the long-term bond yields have trended downwards in recent times steeper than the short-term yields reflects the confidence in the investing community over the future trajectory of the economy, according to the Central Bank Governor.

The condition is also referred to as ‘kink in the yield curve’ in the investment lexicon, when the long-term yields briefly come down over the short-term rates, which is also called the inversion in the yield curve.      

“I think that’s a good indication. Basically, what I read is that there is stability in the medium to long term. That’s a positive sign,” said Dr. Nandalal Weerasinghe speaking at a press briefing last week. 

“Rates are much more favourable in the medium and long term than in the short term. You can see the market sentiment is improving and rates are stabilising and I think it will continue,” he added.

This is also why the Central Bank in recent times raised some significant amount of funds from the medium to long-term funds.  However, the bulk of the funding requirement of the government is continued to be met through T-bills and specifically, the three-month bills, with the expectations that the yields would come down further in the medium term, so that the government could roll over such debt at lower rates. 

Public Debt Department Superintendent and Registrar Dr. M.Z.M. Aazim said there were also occasions where they raised funds through short-term bills to pay for the maturing bonds and as a result, there have been some reduction in the average time to maturity in the bill and bond stock in 2022, compared to last year. 

“Comparing the demand and supply conditions for the government securities in recent times, there has been a slight tilt towards the short-term bills when making the reissuances in the market,” he said.