Increase in bill yields moderates this week after sharp correction during last two weeks

• Dealers divided over whether yields have reached peak level or not

The Treasury bill yields continued their upward trajectory across the tenures, albeit at a much more modest level than the last two weeks, with the one-year bill yield surpassing 24 percent.

However, the Public Debt Department (PDD) of the Central Bank accepted only half the amount it issued at the auction held yesterday and continued to favour mostly the shorter-term bids, as the acceptance of the six-month and one-year bills remained lackadaisical as usual. 

Unlike last week, where the one-year bill yields jumped 767 basis points, recording a historical high, the three-month bill yield rose the most yesterday by adding 350 basis points to settle at 23.21 percent. 

The six-month bill yields climbed 204 basis points to 24.77 percent while the one-year bill added a modest 100 basis points, bringing this week’s average yield to 24.36 percent.

The PDD offered Rs.97.5 billion in bills across the three tenures, with the most or Rs.47.5 billion offered under three-month tenure. 

The PDD accepted Rs.45.15 billion in three-month bills, Rs.917 million in six-month bills and Rs.1.99 billion in one-year bills, raising a cumulative Rs.48.07 billion, which roughly made-up half of what was offered at the action. 
The dealers were divided over the trajectory of the yields at future auctions, as a section of them believes that the bill yields are largely peaked while another section believes that the yields have more room to run its course upwards. 

 Sri Lanka’s Central Bank delivered a massive 700 basis points hike in key policy rates on April 8 to crush demand in a bid to rein in runaway prices caused by the botched rupee float made on March 7, which caused the currency to weaken by more than 60 percent and sent prices soaring.

The idea is that demand destruction could arrest inflation. But the fallout from the rupee weakness itself is reverberating through the markets, society and political landscape, causing massive protests across the island. 
It is only a matter of time that the higher rates would be felt by the masses on their mortgages, personal loans and credit cards, which could spark another wave of defaults and thereby a potential financial sector meltdown.