Investor interest seen at first bond auction in 4 months as rates fall fast

The first bond auction held yesterday after almost a four-month hiatus and the domestic debt restructuring plan announced a fortnight ago, saw full subscription across the two tenors but the yields ended up higher than what was offered.

The Central Bank yesterday issued Rs.50 billion each via two bonds maturing in May 2028 and May 2030 at coupons of 9 percent and 11 percent.

The bond maturing in 2028 received bids worth Rs.93.92 billion and the bond maturing in 2030 received bids to the tune of Rs.85.20 billion, as investors showed enthusiasm to get into long-term bonds amid sharp decline in interest rates.

The Central Bank accepted Rs.50 billion each from both bonds at weighted average yields of 15.74 percent and 15.67 percent. 

The auction remains open to accept a further 20 percent of the amount offered from the respective bonds till 4.00 p.m. today (July 14) – the day prior to the settlement date at the respective weighted average yields of the two bonds.  

After a disappointing bill auction held on Wednesday where the yields spiked in a market defying move, investors appeared to have waited to park their liquidity at relatively higher yields for a relatively longer tenor at a time when the yields and other market interest rates are on a fast descent.

After cutting rates for the second time within a span of just five weeks, Central Bank chief, Dr. Nandalal Weerasinghe said after a long-drawn-out disparity, the benchmark one-year yield was finally coming into parity with the policy rates.

The one-year bill rate came down to 13.86 percent at the auction held a day prior to the policy announcement.

The Central Bank cut its key rates by 200 basis points last week to accelerate the monetary policy transmission and thereby to quicken the economic recovery process.

The Central Bank withdrew from issuing bonds since the initial blueprint was announced for the domestic debt optimisation in the third week of March, which said that bonds would only be restructured upon voluntary participation by their holders while only the bills held by the Central Bank would be subject to restructuring.

In fact when the government announced the final version of the debt restructuring blueprint roughly a fortnight ago, it even exceeded expectations and completely did away with even the voluntary element with regard to bonds. 
As a result both equities and bonds markets cheered the outcome of the domestic debt restructuring by sending the values of both asset classes higher. In bonds, values go up when the yields come down as they are inversely correlated.