ECONOMYNEXT – Sri Lanka has made the second coercive bond sale with gilt dealers being forced to 5-year bonds based on a cut-off decided by the authorities during a 40 billion rupee bond sale.
Sri Lanka has sold 20 billion rupees of bond maturing on 15 July 2023 at an average yield of 11.69 percent of which about 4.0 billion rupees were estimated to have been forced on buyers at the weighted average yield.
The bond was quoted in the secondary market at yields around 11.85/95 percent generating losses for holders. The cut-off is estimated to have been around 12.04 percent, market sources said.
A 15 October 2021 bond forced on buyers at 10.03 percent at the last auction is now trading around 11.50/75 percent with holders now in losses.
An offer of 20-billion rupees of 14-year 3-month bond maturing on 15 January 2033 was fully take up at a weighted average yield of 11.90 percent. It was quoted around 11.70/95 percent. The cut-off is estimated to be around 11.98 percent.
The longer term yield curve is flat in the belief that interest rate spike is temporary with some insurance firms in particular willing to buy the bonds.
Sri Lanka’s interest rates have been rising amid a liquidity shortage generated by a maturing central bank swap and interventions made after the exchange rate came under pressure from excess liquidity and low rates.
Critics say the coercive bond sales are a point of vulnerability both to the financial system and the economy in general, especially when the exchange rate is under pressure.
Rates could come down after credibility returns to the exchange rate peg, market analysts say. (Colombo/Oct12/2018)