December 24, 2012, 5:20 pm
Benchmark Treasury bill yields plunged further yesterday (24) in response to the Central Bank’s policy rate cut earlier this month.
The Public Debt Department of the Central Bank re-issued maturing Treasury bills amounting to Rs. 15 billion at yesterday’s primary market auction. Bids totalled Rs. 37.9 billion of which Rs. 16.5 billion were accepted with yields falling across all tenures.
The 12-month bill yield fell sharply by 49 basis points to 11.69 percent from 12.18 percent a week ago. The six-month yield fell 21 basis points to 11.32 percent and the three-month Treasury bill yield fell 23 basis points to 10 percent.
Currency dealers said the Treasury bill auctions do not reflect actual market trends, with money market interest rates being significantly higher.
"These auctions can be manipulated in that captive funds such as the EPF and NSB are used by the government to buy up its securities and at cheaper rates," a dealer said not wanting to be named.
"Authorities seem to be trying to push higher growth at any cost, and this was why monetary policy rates were slashed by 25 basis points earlier this month. Unless we have strong foreign direct investment flows, such manipulations will lead to faster economic growth followed by longer periods of downturn," the dealer said.
Last week, the three-month, six-month and 12-month Treasury bill yields stood at 10.23 percent, 11.53 percent and 12.18 percent respectively. The average weighted prime lending rate of the commercial banking system, applicable to high net worth borrowers, reached 14.15 percent by the end of last week.
The three-month Sri Lanka Inter Bank Offered Rate (SLIBOR) stood at 13.23 percent, six-month SLIBOR at 13.77 percent and 12-month SLIBOR at 14.27.
Currency dealers said money markets were short, with Central Bank seen printing currency in recent times.
The Central Bank recently pointed out that captive sources were being used to finance the government. It also urged the government to improve its fiscal discipline in order make monetary policy more affective.
"The expansion of credit to the public sector, which includes the government and public corporations remains a concern. Being less sensitive to changes in interest rates, net credit to government depends on the budget deficit and the government’s strategy to finance the deficit, while credit to public corporations depends mainly on the operational losses they incur," the Central Bank said in its recent report ‘Recent Economic Developments: Highlights of 2012, Prospects for 2013’ released last month.
"It is essential that public sector borrowing from the banking sector is restricted to the budgeted levels, in order for the monetary authority to maintain monetary expansion at the targeted level, which is essential for the success of monetary policy implementation," it said.
"The high interest rates and the tight liquidity condition which prevailed in the market towards the latter part of the year made the T-bonds market illiquid. Hence, there had been less demand for T-bonds in latter part of 2011. Consequently, only Rs. 514.6 billion or 95.45 per cent of initially planned borrowings of Rs. 539.2 billion under T-bonds was raised in 2011. Further, nearly 96.00 per cent of the total borrowings made through T-bonds in 2011 came from captive sources such as EPF, ETF, and NSB. Due to the above mentioned developments, Rs. 79.6 billion was raised through new issuances of T-bills, on book value terms, nearly twice the initially planned new issuance of T-bills in 2011," the Public Debt Department of the Central Bank said in a separate report.