Govt. builds cash buffer to mitigate reliance on market for funding

• This is expected to further quicken ease in bond yields and interest rates

In another positive development, the government has established a cash buffer, enabling a reduction in its dependence on the market for weekly funding through Treasury bills and bonds.  

This newfound flexibility empowers the government to strategically determine the amount to raise from the market. 
Stating as to why the Central Bank, on behalf of the government, raises less than what it offers via bill and bond auctions, Central Bank Governor Dr. Nandalal Weerasinghe said it is because now the government has relatively more flexibility over its finances, due to enhanced revenue flows.      

“The government has built up this buffer for them to be able to make short-term debt service payments,” Dr. Weerasinghe said. 

It appears that the higher revenues made via raising taxes since last year and cutting expenditures have given the Treasury more room to determine how much to raise via bill and bond auctions and at what rates.  
Further, the government also appears to have cut its reliance on overdrafts from state banks for its urgent short-term funding needs.  

The continuous dependence of the government on funds from the state banks has significantly burdened the latter’s balance sheets over an extended period. 

As a result of enhanced inflows and the implementation of rigorous fiscal and structural reforms, the government has successfully transformed its overdrafts with banks into positive cash balances. 

“Without relying on overdraft facilities from the two state banks, the government instead has deposits now. That I think is a good development,” Dr. Weerasinghe said.

Improved fiscal conditions and the large amounts already received and slated to receive from multilateral agencies for budget support are expected to further bring down the requirement for funds for the government from the market. 

This in turn would leave more money available for the private sector, thereby helping to quicken the ease in yields and the interest rates in the weeks and months to come, helping to relax the financial conditions further.  

Benchmark one-year T-bill yield continues to show downward stickiness

The benchmark one-year Treasury bill yields continued to show downward stickiness at the final primary bill auction held for the year on Wednesday, where the Central Bank raised the full offered amount of Rs.77.5 billion.
The benchmark one-year bill yield held steady at 12.93 percent, unchanged from last week’s levels, after it gained 10 bps from the week earlier. 

Both the three-month and six-month bill yields continued to tick lower by six basis points and eight basis points each, to settle at 14.51 percent and 14.16 percent, continuing the modest declines seen in the previous weeks. 
At the start of the year, most of these bills were generating yields that were above or close to the 30 percent mark.
For instance, at the first bill auction held this year, both the three and six-month bills fetched yields of 32.01 percent and 32.02 percent each, while the one-year bills fetched 29.16 percent.

At the bill auction held on Wednesday, the Central Bank offered Rs.27.5 billion under the three-month bills and Rs.25 billion each under the six-month and 12-month bills. 

But as usual, it accepted far higher than what it offered under the two short-term bills – Rs.33.80 billion under the three-month bill and Rs.42.97 billion under the six-month bill. 

However, the Public Debt Department of the Central Bank accepted only Rs.732 million from the one-year bill, possibly because most bids surpassed the yield levels observed in the previous week.

The Central Bank in November paused its monetary easing cycle, after cutting rates by 100 bps, to give space for the benchmark yield and interest rates to fall near the policy rates. 
Currently, the policy rates stand at 9.0 percent and 10.0 percent, respectively.