Treasury bill yields jump setting multi-year highs

• Benchmark one-year bill yields surge 767 bps to 23.36%, with room for further upward adjustments

The yields of the Treasury bill auction yesterday jumped across the board to their highest levels in many years, in line with Friday’s 700-basis point rate hike by the Central Bank, under its new Governor Dr. Nandalal Weerasinghe.
The unprecedented monetary tightening sent jolts across the bill yields, as they rose between 559 basis points and 767 basis points, recording the highest single-day surge ever in Sri Lanka’s financial market history. 

The three-month bill yield jumped 559 basis points to 19.79 percent, while the six-month bill yields surged 731 basis points to 22.73 percent.

The benchmark one-year bill yields registered the highest-ever jump, rising 767 basis points to settle at 23.36 percent. 

The bill yields were the earliest to reflect Friday’s shock move by the Central Bank, which delivered the highest ever increase in key policy rates since the 300-basis point hike in 2001.  

Soon after raising the interest rates, Dr. Weerasinghe said he wants to see the response of the rate hike when the markets reopen on Monday. 

How the stock market would absorb the rate hike effect could not be seen on Monday, as the market was closed on April 11 and 12, after the government declared special public holidays prior to the Sinhala and Tamil New Year holiday that falls on the 13th and 14th. 

The rationale for the aggressive hike in key rates, according to the Monetary Board, is to rein in the inflation, which is galloping at more than 14-year highs and the Central Bank’s inflation forecasts showed inflation peaking at 28 percent in three months. 

At the auction held yesterday, the Central Bank offered Rs.87.5 billion in bills across the three tenures but accepted Rs.81.9 billion, as the Public Debt Department as usual accepted little amounts from six-month and one-year bills, although there was some improvement in bids received and amounts accepted than previous weeks. 
According to dealers, there is further scope for the bill yields to rise and they do not rule out the one-year bill yields above 30 percent in the next couple of weeks. 

If that happens, banks can raise deposits and put them in Treasury bills and do nothing else and still make a nice risk-free profit in the next couple of years.