Foreign holdings in government securities fall below Rs.100bn

• Touches lowest point since last April
• Foreigners have offloaded Rs.18,277 mn worth bills and bonds on net basis

Foreign holdings in Sri Lanka’s government securities fell under Rs.100 billion last week, touching the lowest point since April last year as foreigners have been offloading the bills and bonds they were holding in Sri Lankan treasuries since the middle of last year.

According to Central Bank data, foreigners have sold Rs.4,442 million equivalent of bills and bonds during the week ended  February 22 bringing the total government securities portfolio held by them to Rs.99,164 million.
For the year, they have offloaded Rs.18,277 million worth of bills and bonds on a net basis after adding a net Rs.91,869 million worth of treasuries into their holdings last year, despite them turning net sellers in the second half of the year.  

Foreigners started allocating their funds into Sri Lankan securities since around the announcement of the Staff level agreement with the International Monetary Fund (IMF) in September 2022.
Thereafter, foreigners have been adding into their bond holdings, lured possibly by the progress made by the Sri Lankan economy with the improving foreign currency liquidity and unlocking of the IMF bailout in March.

However, this buying spree was short-lived. Foreign investors began offloading their holdings from July onwards, after their holdings peaked at 188,984 million by the end of June. The reason for this shift in sentiment towards Sri Lankan treasuries is not immediately clear, especially given the country’s economic advancements. One possible explanation is the higher yields offered by US treasuries, which provided foreign investors with a better risk/return profile for their fixed income allocations.

The benchmark 12 months bill currently offers 10.11 percent in the secondary market while the equivalent 10- year bond yields 12.99 percent, steady from a week ago.
Adjusted for taxes and inflation, the 12 months bill effectively offers a negative yield for an investor whose annual income is taxed at the highest income bracket.
Despite a relatively stable exchange rate at present, a foreigner who invests in the Sri Lankan treasuries also assumes the foreign exchange risk.

At its peak in December 2014, foreigners held over Rs.453 billion or roughly US$ 3.5 billion worth of Sri Lankan government securities, before the majority population elected a new government led by the Sirisena-Wckremesinghe duo to establish the so-called ‘good governance’.
And at the end of their term in 2019, the foreign holdings in Sri Lankan government securities had fallen to Rs.104,678 million or less than a quarter of what was at the start of their term in 2015.