Short-term debt capital market comes under pressure

• Underwhelming response to commercial papers observed as investors flock to Treasuries

Making an about turn from the two years of the pandemic, which drew investors into the short-term debt capital instruments, hunting for higher rates, markets are now witnessing the opposite with government Treasuries offering safe haven with record-high yields. 

ICRA Lanka said it witnessed some pressure on the commercial paper market, a financial instrument used mainly by the rated corporates to raise short-term capital, after the sharp upturn in the yields on the Treasuries. 
“ICRA Lanka notes that the recent increase in systemic interest rates has created some pressure on the commercial paper market, as the institutional investors are increasingly focusing on treasury investments,” the rating agency said.

As the interest rates and the yields fell to record low levels during the two years of the pandemic, investors hunting for higher returns and better yields added commercial papers into their investment portfolios while accumulating equities, which hit record highs in 2021. 

However, the conditions changed from the beginning of 2022 before the equities and interest rates took a wild turn after the economy collapsed in March, when the foreign exchange shortage came to a head, plunging the country into hyperinflation and energy and food crisis. 

With the Treasury yields shooting up to record-high levels in April, investors bought Treasuries and sold equities and other instruments, as the Treasuries offered them a risk-free investment. 

The recent data also showed that banks were raising customer deposits to buy Treasuries instead of lending, making them a comfortable margin with virtually no risk. 

The latest data available on commercial papers also reflect this phenomenon, as cumulative issuance of short-term papers by Sri Lankan companies plunged to just Rs.500 million in the four months to April 2022, from Rs.5.8 billion by the end of December 2021. 

Meanwhile, the total outstanding commercial paper issues also slipped to Rs.900 million by the end of April 2022, from Rs.1.1 billion four month ago.