One-year bill yield continues to advance above 12%; 3-month bill nears 13%

• Some banks pause on lending expecting sharp adjustment in lending rates 

The yields of the Treasury bills continued to advance unabated at the auctions held this week, with the benchmark one-year bills adding as much as 28 basis points to 12.28 percent, as the bond investors continued to seek higher yields, which can compensate for the higher inflation in the economy.  

The inflation impulses are at an all-time high as the botched currency float on March 7 alongside the global commodities price increases led by the sharp rise in energy prices in the aftermath of Russia invading Ukraine pushed Sri Lanka’s inflation close to 19 percent in March.  

The banking sector as a whole has taken a wait-and-see approach as some small to mid-time lenders, which have tight funding costs and liquidity have paused their lending, expecting the lending rates to hit 20 percent or more in a matter of months.  

Some banks have already temporarily halted growing their loans and advances books, due to the heightened uncertainty and the sharp one-side swings in the bond market, which tell-tale the direction of the lending market.  
The forex shock is so high that its reverberations could soon push the lending rates above 20 percent, an era which Sri Lanka passed many years ago. 

The Central Bank this week had to reject all bids received for its Rs.45 billion bond auction as the investors sent bids sharply higher than what the Public Debt Department offered in a sign there is still a sharp adjustment in rates is due. 

The Monetary Board is expected to deliver another 100-basis point or more policy rate hike when the Monetary Board is expected to announce the next monetary policy review on April 4. 

Meanwhile, at the primary bill auction held on March 30, the Central Bank offered Rs.48 billion worth of bills across the three tenures and accepted the same amount with Rs.47.7 billion coming from the three-month bills.   

The yield of the three-month bills added 82 basis points to 12.92 from last week, bringing the total increase during the year so far to 4.76 percent, the highest ever in Sri Lanka’s bond markets’ history within a very short span.  

Meanwhile, the six-month bill added 27 basis points to 12.25 percent this week with the year-to-date increase in the bill yield measured at 3.92 percent.  

The benchmark one-year bill yields advanced 4.04 percent during the year so far after it jumped 28 basis points to 12.28 percent this week.  

Sri Lankan bond market is in for a wild run this year as the real economy is set to undergo some tough reforms before it could emerge from the current crisis it is in.