Treasury bill yields moderate for second consecutive week

• one-year bill yield eases by 27bps

The Treasury bill yields at the primary auction held yesterday continued to moderate for the second week in a row, after the sharp correction on April 11, when the Monetary Board delivered an unprecedented 700 basis-point hike in key policy rates on April 8. 

There was widespread expectation among the primary dealers and bond investors that the one-year bill yield could even go beyond 30 percent levels in the couple of weeks following the sharp 
policy rate hike.

But last week’s and this week’s behaviour of yields suggested that they have mostly settled at the current levels, although the near to medium future remains largely uncertain, as the usable reserves have fallen to only three days of imports.

The stock market swoon that was seen in the first two days since the market reopened this week also showed some signs of stabilising with the All Share Price Index gaining 5.43 percent or 375.15 points yesterday to close at 7,280.52. 

However, nothing is well in Sri Lanka and the country’s economy is far from being out of the woods. 
At the auction held yesterday, the benchmark one-year bill yields shed 27 basis points to settle at 24.09 percent while the six-month bills also eased 81 basis points to 23.96 percent. 
Meanwhile, the three-months bills added 32 basis points to 23.53 percent, after it gained 350 basis points last week. 

Meanwhile, unlike last week, the auction also saw the Central Bank accepting all the bills offered, although much of it was skewed towards the shorter end of the curve. 

The Public Debt Department of the Central Bank offered Rs.87.5 billion in bills, of which Rs.78.75 billion was accepted under three-month bills, Rs.1.11 billion under six-month bills and Rs.7.74 billion under one-year bills.
This however indicates that the short-term bill investors still remain skittish over the yield offered under the one-year tenure, as it is still under the country’s official inflation rate, which is expected to hit 30 percent in the next couple of months. 

However, Sri Lanka is in a hyper inflationary environment, where the prices have soared after the rupee was floated. 

As a result, the bond investors still generate negative real yields on their fixed income investments and could demand higher nominal rates in the weeks to come.