T-bill yields jump for second week in a row signalling higher borrowing costs

• One-year bill rate jumped 51bps to 7.01% bringing total increase to 89bps since yield controls removed 

Sri Lanka’s Treasury bill rates at the primary auctions held this week rose across all maturities for the second consecutive week since the lifting of yield controls by the Central Bank, indicating that yields haven’t ended its upward movement, while signalling that the trend could spill into the rest of the market interest rates. 

At the bill auction held on Wednesday, the yields of the 3-month bills rose by 32 basis points (bps) to 6.70 percent bringing the two weeks’ increase in the yield of the shortest tenor bill to 62bps. 

The yield of the 6-month bills rose the most by 72bps to 6.99 percent this week taking the cumulative increase in the yield to 109 bps since last week. 

Meanwhile, the mostly watched one-year bill rate jumped 51bps to 7.01 percent bringing up the total rise in the benchmark rate to 89bps since yield controls were removed. 

While the Central Bank offered Rs.51.5 billion bills on Wednesday, it accepted only 61 percent or just Rs.31.2 billion of the bills most of which or Rs.27.9 billion were from the 3-month tenor. 

Sri Lanka’s primary auctions held for Treasury bills and bonds have remained largely dysfunctional for months due to guidance rates on bills and bonds put in place by the Central Bank as a tactic to keep the interest rates in check while purchasing unaccepted bills and bonds with printed money at those ceiling rates, which effectively function as de-facto policy rates.  Economists argue that excess money printing impacts Balance of Payments as such moneys fuel demand for imported goods, as a result of increased foreign exchange outflows. 

The yield curve which showed some upward movement since last week, specially at the short end of the curve would reflect a steeper an upward shift following this week’s yield jumps. 

The Central Bank also issued Rs.20 billion in a bond auction on Tuesday after lifting the guidance rates on bonds but accepted only Rs.16.8 billion. But the subscription for the bond maturing on May 2030 was kept open until 4.00 p.m. on September 30. 

The Public Debt Department accepted bids worth Rs.6.8 billion, out of Rs.10 billion offered for the bond maturing on November 2023 at a weighted average yield of 8.12 percent, slightly up from where similar tenured bonds were trading, while the total offered amount of Rs.10 billion was accepted on the May 2030 bond at an average yield of 10.23 percent.  

The average weighted prime lending rate (AWPLR), the rate at which banks loan moneys to their prime customers, moved up since the Central Bank raised its key policy rates on August 19. As of last Friday, the AWPR was at 6.46 percent, up 59 basis points since then. 

This provides a forerunner for the rest of the market lending rates to shift upwards although August interest rates haven’t moved up as yet.

While the new deposit rates have also edged up at 5.19 percent by the end of August, that hasn’t kept up with the one-year Treasury bill rate, which is at 7.01 percent, and it would be a matter of time the deposit rate would catch up with the benchmark Treasury bill rate. 

However, banks may not show an urgency to raise their deposit rates as yet as they currently operate with adequate liquidity levels which they try to disburse through high yielding loans as raising deposits at higher rates crimp their margins.