T-bill yields could level off in near term: ICRA Lanka

The treasury yields, which went on a continuous ride upwards since the lifting of the yield caps in mid-September, are likely to level off in the coming weeks, after the Central Bank decided to hold the key policy rates last week, likely bringing an end to the wild run in the government securities yields, according to ICRA Lanka Limited. 

The treasury bill yields at the primary auctions held since September 22, the first since the reference yields were removed, rose by between 116 basis points to 196 basis points across the three tenures, with the benchmark one-year bill yield rising the least by 116 basis points to 7.28 percent thus far, partly as a result of the Central Bank rejecting all bids received at last week’s auction under six and 12-month bills, favouring three months. 

The Central Bank last week said although part of the increases reflects a “market correction”, some of it was “excessive”.  

“We may see some levelling off of treasury yields in the next few weeks,” said ICRA Lanka Limited, a ratings agency, in its latest edition of the monthly economic watch titled ‘Economy recovers as Delta subsides’.

In the run up to last week’s Monetary Policy decision, some in the financial markets thought the weeks-long wild run in the treasury yields would prompt the Monetary Board to deliver another rate hike.  But they were soon found disappointed after the rate setting committee decided to hold the current monetary policy stance to support the economy, which is staging a recovery after a month-long virus-related restrictions. Hours after leaving rates steady, the Central Bank shrugged off claims to the effect that they should have taken cues from the behaviour of the treasury yields to determine the trajectory of the key policy rates. 

“Policy rates are a steady rate that you keep (and) the T-bill rates can fluctuate. So, policy rates don’t follow the T-bill rates. Policy rates aren’t changed in tandem with the T-bill rates,” said Central Bank Governor Ajith Nivard Cabraal last week, responding to a question raised on the matter. 

While adding that sometimes the Monetary Board may take the behaviour in treasury bill yields into consideration when deciding on the key policy rates, he added that “at the moment we believe the policy rates that have been set out are appropriate”, in the context of the Sri Lankan economy. 

In this context, ICRA Lanka said with the worst of the Delta variant is behind the country, “Sri Lanka is looking at a fairly modest and undisturbed economic performance in 4Q”, as businesses by and large have also gotten used to operating amid the pandemic over time.  Sri Lanka will also soon reach the milestone of 60 percent of its population being fully vaccinated against the virus, helping the country to return to business as usual after more than 18 months of hunkering down.