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Treasury (T) Bill yields moved up sharply at last week’s auction in tandem with its previous increases, which a market source described to this reporter as being a disaster.
Yields on 91 and 182 day Bills moved up by 10 basis points (bps) each to 7.39% and 7.45% respectively and that of the benchmark 364 day Bills by 15 bps to 7.59%.
“I expected the benchmark one year T Bill rate to be allowed to go up to the 7.50% level only and not beyond that, but a 15 bps increase is absurd,” he said.
In tandem with these increases, panic selling crept into the secondary bond market, as a result of which the yields of the more popular 2014 and 2015 maturing T Bonds jumped by between 20-25 bps to be trading at yields commanding 9% and 9.40% respectively.
“At this stage we have to only hope and pray,” he said. The status quo was maintained throughout the rest of last week.
“Central Bank of Sri Lanka (CBSL) is depending on a US$ ($) one billion inflow (either in the form of portfolio investments or foreign direct investments) by the year end which CBSL Governor Ajit Nivard Cabraal recently said was coming, but if that doesn’t come through, the next casualty will be market interest rates coupled with the exchange rate (ER),” he said (see also this publication’s economy pages of 16.10.11.).
However due to last week’s business undertakings takeover act, it’s unlikely that such inflows will materialize due to fears of nationalization and takeover of business enterprises, the source said, thereby placing both the ER and interest rates in jeopardy.
At the weekly auction held two weeks prior to that of Wednesday’s (November
, ie on October 25, yields of those tenures went up by five, six and eight bps to 7.29%, 7.35% and 7.44% respectively.
CBSL says that the point to point inflationary change is 5.1%, with inflation coming down, but the benchmark T Bill rate is galloping way beyond, it’s difficult to believe which figure is correct, the source said.
Under normal circumstances the one year T Bill rate should move in tandem with inflation, he said.
CBSL has linked the rise in T Bill yields due to a rise in deposit rates as banks were facing a liquidity crisis.
However the pros and cons of the market being the trendsetter with CBSL being a follower are debatable. “Then why did they not previously allow T Bill rates to go up? The source asked.
CBSL has also indicated rapid credit growth coupled with the demand for $s as being further causes for the rise in rates.
CBSL has been defending the greenback at Rs. 110/20 to the $ in inter-bank trading in recent times.
“You cannot defend both the ER and interest rates simultaneously. CBSL has now realized this and they have allowed the rates to go up,” the source said (see also this publication’s business pages of 23.10.11.)
Currently market interest rates are generally in the region of 14-15%, but if this trend continues those too are bound to rise, the source said.
A rise in T bill yields, ie a rise in the interest payable by the Government for Government debt holders, also has a cascading effect on market interest rates, making lending rates more expensive, thereby stultifying investments and hence job creation.
Meanwhile the weekly T Bill auction of November 2 (ie the auction held immediately following the October 25 weekly auction) saw CBSL rejecting all bids received, ostensibly because the market was asking for higher yields than that which the CBSL/Treasury was prepared to pay (see also last week’s business pages of this publication).
Envisaging a hike in rates, the business pages of this publication in its lead story of 30.10.11 under the heading “Rise In T Bill Yields Portends Lending Rate Hike” said, “The sharp rise in T Bill primary rates that began a fortnight ago continued at last week’s (October 25) weekly auction as well with T Bill rates for 91, 182 and 364 day Bills rising by five, six and eight bps to 7.29%, 7.35% and 7.44% respectively.
In tandem with the increase in T bill yields, yields of the popular T Bonds of 2014, 2015 and 2016 maturities also went up by 10 bps each to 8.75-8.80%, 9.20% and 9.30% respectively,..
A source said that the availability of cheap credit coupled with an artificially strong ER, thereby making imports relatively cheap was the cause for the rate rise with CBSL defending the ER in inter-bank trading at Rs. 110/20 to the $ despite pressure for it to weaken due to the demand for the greenback in the market…”
Whether Wednesday’s sharp T Bill hike was a once and for all rise or not, probably this week’s auction may tell.
http://www.thesundayleader.lk/2011/11/13/er-to-weaken-interest-rates-to-rise/
Yields on 91 and 182 day Bills moved up by 10 basis points (bps) each to 7.39% and 7.45% respectively and that of the benchmark 364 day Bills by 15 bps to 7.59%.
“I expected the benchmark one year T Bill rate to be allowed to go up to the 7.50% level only and not beyond that, but a 15 bps increase is absurd,” he said.
In tandem with these increases, panic selling crept into the secondary bond market, as a result of which the yields of the more popular 2014 and 2015 maturing T Bonds jumped by between 20-25 bps to be trading at yields commanding 9% and 9.40% respectively.
“At this stage we have to only hope and pray,” he said. The status quo was maintained throughout the rest of last week.
“Central Bank of Sri Lanka (CBSL) is depending on a US$ ($) one billion inflow (either in the form of portfolio investments or foreign direct investments) by the year end which CBSL Governor Ajit Nivard Cabraal recently said was coming, but if that doesn’t come through, the next casualty will be market interest rates coupled with the exchange rate (ER),” he said (see also this publication’s economy pages of 16.10.11.).
However due to last week’s business undertakings takeover act, it’s unlikely that such inflows will materialize due to fears of nationalization and takeover of business enterprises, the source said, thereby placing both the ER and interest rates in jeopardy.
At the weekly auction held two weeks prior to that of Wednesday’s (November
, ie on October 25, yields of those tenures went up by five, six and eight bps to 7.29%, 7.35% and 7.44% respectively.CBSL says that the point to point inflationary change is 5.1%, with inflation coming down, but the benchmark T Bill rate is galloping way beyond, it’s difficult to believe which figure is correct, the source said.
Under normal circumstances the one year T Bill rate should move in tandem with inflation, he said.
CBSL has linked the rise in T Bill yields due to a rise in deposit rates as banks were facing a liquidity crisis.
However the pros and cons of the market being the trendsetter with CBSL being a follower are debatable. “Then why did they not previously allow T Bill rates to go up? The source asked.
CBSL has also indicated rapid credit growth coupled with the demand for $s as being further causes for the rise in rates.
CBSL has been defending the greenback at Rs. 110/20 to the $ in inter-bank trading in recent times.
“You cannot defend both the ER and interest rates simultaneously. CBSL has now realized this and they have allowed the rates to go up,” the source said (see also this publication’s business pages of 23.10.11.)
Currently market interest rates are generally in the region of 14-15%, but if this trend continues those too are bound to rise, the source said.
A rise in T bill yields, ie a rise in the interest payable by the Government for Government debt holders, also has a cascading effect on market interest rates, making lending rates more expensive, thereby stultifying investments and hence job creation.
Meanwhile the weekly T Bill auction of November 2 (ie the auction held immediately following the October 25 weekly auction) saw CBSL rejecting all bids received, ostensibly because the market was asking for higher yields than that which the CBSL/Treasury was prepared to pay (see also last week’s business pages of this publication).
Envisaging a hike in rates, the business pages of this publication in its lead story of 30.10.11 under the heading “Rise In T Bill Yields Portends Lending Rate Hike” said, “The sharp rise in T Bill primary rates that began a fortnight ago continued at last week’s (October 25) weekly auction as well with T Bill rates for 91, 182 and 364 day Bills rising by five, six and eight bps to 7.29%, 7.35% and 7.44% respectively.
In tandem with the increase in T bill yields, yields of the popular T Bonds of 2014, 2015 and 2016 maturities also went up by 10 bps each to 8.75-8.80%, 9.20% and 9.30% respectively,..
A source said that the availability of cheap credit coupled with an artificially strong ER, thereby making imports relatively cheap was the cause for the rate rise with CBSL defending the ER in inter-bank trading at Rs. 110/20 to the $ despite pressure for it to weaken due to the demand for the greenback in the market…”
Whether Wednesday’s sharp T Bill hike was a once and for all rise or not, probably this week’s auction may tell.
http://www.thesundayleader.lk/2011/11/13/er-to-weaken-interest-rates-to-rise/
