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Yields Decline May Force Rate Cut

Sep 18, 2010 3:15:25 PM - thesundayleader.lk
  • Despite Cabraal’s views to the contrary

Ajith Cabraal

Six month Treasury (T) Bill yields fell below Central Bank of Sri Lanka’s (CBSL’s) repo rate to 7.17% at Wednesday’s primary auction, prompting market sources to speculate that this would compel CBSL to announce a rate cut at Friday’s Monetary Board (MB) meeting, despite CBSL Governor Ajith Cabraal allegedly telling a foreign news service recently that CBSL would keep policy rates stable.
The MB meeting was earlier scheduled for Wednesday, but was inexplicably postponed by nine days to Friday.
CBSL’s overnight (O/N) repo rate, the rate at which it pays commercial banks for parking their excess cash with it on an O/N basis is 7.25%, while its reverse repo rate (the rate at which it lends money to banks on an O/N basis) is 9%.
However weighted average yields (WAYs) of 182 and 364 day maturities fell by 11 and 12 basis points (BPs) to 7.17% and 7.30% respectively at Wednesday’s auction week on week (WoW), prompting a source to say that he never expected yields to fall.
There were no 91 day maturities on offer at this auction.
The market’s contention is that if CBSL offers to pay more through its repo window, what incentive is there for it to invest its monies in Government Treasuries (Government debt), thereby warranting a rate cut, so as to make it unattractive for the market to invest their monies in the repo window, but rather in Treasuries, which then would be offering a higher return than the repo, in the event of a rate cut.
However with rising food prices causing inflationary pressure globally, central banks worldwide have been tightening monetary policy by hiking up those rates, rather than doing the reverse, as what appears to be Sri Lanka’s case.
But in secondary market trading of T Bonds on Wednesday, yields held steady, with 2014, 2015 and 2016 maturities fetching yields of 8.30%, 8.70% and 8.90% respectively. However 10 year T Bonds at Monday’s primary auction fell for the third time running in under two months, with its WAY falling by 37 BPs to 9.30%.
At the previous T Bond primary auction held last month, its WAY fell by 20 BPs, from 9.87% to 9.67%, ie at the T Bond auction immediately preceding that of Monday’s.
Meanwhile CBSL for the second week running “ducked” apportioning to the market a parcel of 91day tenure for bids at last week’s T Bill auction as well, which sources attributed to the fact that in the T Bill auction held two weeks prior to that, the WAY for T Bills of 91 day tenure too fell below CBSL’s O/N repo rate.
At that T Bill primary auction which was held on September 1, 2010, the WAY of T Bills of 91day tenure fell by 15BPs WoW to 7.13%, 12 BPs lower than CBSL’s O/N repo rate of 7.25%, prompting CBSL not to offer this tenure in the last two weekly auctions that followed, on the grounds that there was no incentive for the market to invest in this tenure as CBSL’s O/N repo rate was offering a higher return.
Meanwhile the US dollar-rupee parity in two way quotes on Wednesday held steady at the Rs.112.50/60 levels with no intervention from CBSL.

50 BPs Cut Envisaged
Market expectations are that the Central Bank of Sri Lanka (CBSL) will bring down policy rates by 50 basis points (BPs) at Friday’s Monetary Board (MB) meeting, a market source who didn’t want to be named told The Sunday Leader.
But when he was told that CBSL Governor Ajith Cabraal had allegedly told a foreign news service recently that there won’t be a change in policy rates, the source then questioned as to why then the MB meeting which was earlier scheduled for September 15, was postponed to September 24? He further said that due to foreign inflows experienced in the market last week, the rupee strengthened by 20 Sri Lanka cents week on week (WoW), to close the week at Rs. 112/40/45 in two way quotes against the US Dollar. The source added that in secondary market trading, yields of Treasury Bonds,  across the board, had fallen by 10 BPs WoW.