Foreign holdings in govt. securities slump most since mid-September

• Unload bonds and bills worth Rs.3bn last week
• Foreign holdings now at 0.15% of total govt. securities stock
• MB facing difficult balancing act of offering higher returns to foreigners while keeping domestic interest rates low

Foreign holdings in government securities fell the most last week as the Central Bank faces a difficult balancing act between offering higher returns for foreigners who hold Sri Lankan treasuries and supporting the domestic economy by keeping interest rates lower-for-longer.

According to the data, foreign holdings in the government securities fell by as much as 23 percent in the week ended on October 21, the highest weekly fall in recent weeks, undermining some gains made during the first couple of weeks in September. 

The foreigners unloaded Treasury bills and bonds worth Rs.3.0 billion during last week alone, leaving the total holdings at barely above Rs.10.3 billion out of the total outstanding bills and bonds stock of Rs.6, 731.6 billion. 
This is merely 0.15 percent of the total outstanding government securities stock. 

The Monetary Board last week kept its key policy rates unchanged at the seventh meeting for the year as it considered prices of the economy as benign and the current flow of money into the real economy adequate to power the next leg of economic growth into the fourth quarter and beyond. 

The rate setting committee is however on a tough balancing act in determining the rates, as substantially lower rates could send away the yield-seeking foreign investors from the Sri Lankan securities market, while the committee remains hamstrung to raise rates, with the economy battered by the virus requiring monetary support. 
The Monetary Board will have to lean more towards monetary easing for longer as economic growth could continue to face headwinds from the virus, at least in the short to mid-term.

However, the yields offered by the Sri Lankan treasuries are still attractive compared to the near-zero or negative yields offered by developed market treasuries such as in the United States, United Kingdom and Europe. 

Sri Lanka now offers up to two-year hedge via foreign currency swaps to induce foreigners to invest in local treasuries without having to worry about the risk of foreign currency, a measure which came into effect this month.

During the two weeks ended on September 16, foreigners bought government securities worth Rs.1.7 billion, bringing total foreign holdings up to Rs.13.5 billion, capping a seven-month foreign capital flight from the government securities market. 

At its peak at the beginning of January 2015, foreigners held Rs.453.3 billion worth Treasury bills and bonds or about US$ 3.5 billion, accounting for 11.36 percent of the total outstanding stock of government securities.