Wednesday 30 July 2014

Sri Lanka 6-month Treasuries yield plunge to four decade lows

July 30, 2014 (LBO) - Sri Lanka's three and six month Treasuries yields have dropped below the overnight cash withdrawal policy rate, plunging to levels not seen since the mid 1970s, official data showed.

The 6-month yield dropped 7 basis points to 6.47 percent at Wednesday's auction to three ticks below the 6.5 percent overnight cash withdrawal window rate.

The 3-month rate fell 07 basis points to 6.47 percent. The 3-month auction yield dropped to 6.5 percent on July 02 and to 6.49 percent on July 09, data from the state debt office showed.

The 12-month rate 10 basis points to 6.58 percent.

Excess liquidity from dollar purchases by the Central Bank has driven interest rates lower and but banks can deposit cash overnight at 6.5 percent at the standing 'repo' window of the Central Bank.

According to official Central Bank data the 3-month Treasury bill rate was last seen at 5.0 percent in 1976, when a lender of last resort 'bank rate' was 6.5 percent.

At the time there were no auctions to transmit market signals and most Treasury bills outstanding was bought by the Central Bank leading to forex shortages and the worst exchange controls seen in the country's history.

In 1977 the 3-month yield was raised to 9.0 percent, official records show. Amid heavy deficit spending, oil subsidies, war, money printing and ensuring balance of payments crises, the three months yield then topped 20 percent at time on ensuing years.

But in 2014 weak credit has put upward pressure on the currency and the Central Bank is withdrawing liquidity instead of injecting cash (printing money). The policy rate for injecting money is now at 8.0 percent.

Similar situations were seen after balance of payments crisis in 2001 and 2009, with better budgeting, market priced energy and foreign capital inflows.

Available records show Sri Lanka's Treasuries yields also fell to around 7 percent in 2010 with the 6-month yield at 6.95 percent on September 07.

In 2003 also Treasuries rates touched 7 percent with the 12-month yield dropping to 6.98 percent on November 07.

In 2003 measured consumer inflation was near zero or lower until the Janatha Vimukthi Peramuna, a faction of Sri Lanka's elected ruling class through its 'removing the plug' theorem pushed the country into fuel subsidies and money printing leading to near 20 percent inflation and currency depreciation in 2004.

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