Sri Lanka raises further US $ 100mn via development bonds

Sri Lanka raised US $ 100 million via development bonds at an auction held between July 22 and July 27, the second such auction since June 25, when the government raised a similar amount, as the government ramped up borrowings for dollar liquidity.  

The Public Debt Department (PDD) of the Central Bank, which conducted the auction, received bids worth of US $ 138.34 million. 

The Central Bank called for bids under four tenors from one year and one month up to four years and six months, with two other tenors in between, with the option for fixed and floating yields offered for the nearest two tenors – one year and one month and one year and eight months – to be selected by the investors, depending on their risk appetite. 

But the investors mostly favoured the shortest tenor, with a fixed yield as 76 percent of the bids or US $ 105.33 million were received under that category. 

The PDD accepted US $ 73.33 million under one year and one month tenor, with a fixed rate of 6.57 percent. The yields under each tenor were between 6.09 percent for the lowest tenor and 6.80 percent for the highest tenor bonds. 

The date of the settlement falls on July 30. 
Sri Lanka’s yields of rupee treasuries have now fallen below the dollar yields, as the 12-month bill was sold for 4.86 percent last week, since the treasury yields and other market lending rates were seen falling sharply with the Monetary Board cutting the policy rates by 100 basis points early July. 

Hence, the dollar yields remain attractive for investors, mostly banks, which operate with dollar deposits, to earn a higher return in a risk-free investment such as development bonds. 
Meanwhile, the government has ratcheted up its borrowings via alternative means, as its access to international capital markets remains impaired this year, due to the pandemic-driven market unease. 

The country will also receive lower income from exports and current account inflows will also be hugely waned, mainly due to the halt in the tourism trade for many months. 

This week, Sri Lanka’s Central Bank entered into a US $ 400 million swap arrangement with the Reserve Bank of India (RBI) while discussions are ongoing with the RBI to secure a further US $ 1 billion, under a special bilateral swap agreement.