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Rates Start Increasing

Oct 23, 2010 3:25:20 PM - thesundayleader.lk

Yields moved up for the third consecutive week at Wednesday’s primary Treasury (T) Bill auction, complementing that which was said in these pages in The Sunday Leader issue of October 3, 2010 that a policy rate cut is needed to trigger a downward movement in rates.
Central Bank of Sri Lanka (CBSL) at Tuesday’s Monetary Board (MB) meeting left policy rates unchanged at 7.25% and 9% respectively.
Weighted average yields (WAYs) of 182 and 364 day T Bills moved up by five basis points (BPs) each week on week (WoW) on Wednesday, following similar increases the previous week and four and two BPs increases of these tenures at the October 6 auction to end Wednesday at 7.09% and 7.22% respectively.
Meanwhile CBSL after withholding the issue of 91day maturities to the market for five consecutive weeks, made this issue available at Wednesday’s auction, where its WAY fell by 11 BPs to 7.02%. However market sources told The Sunday Leader that this decline may be discounted as this tenure had not been on offer for five consecutive weeks prior to Wednesday’s auction.
Rs. one billion of this tenure was offered to the market, of which it was allowed to subscribe to Rs. 1.1 billion of this tenure, from a total of Rs. 2.2 billion worth of bids. On an overall basis, only Rs. three billion worth of bids for all three tenures were accepted at Wednesday auction.
CBSL withdrew offering 91 day tenures to the market after its WAY fell below CBSL’s overnight repo rate of 7.25% at the September 1 primary T Bill auction, the last time that this tenure was offered to the market, before making a comeback on Wednesday.
The 91day maturity fell by 15 BPs WoW to 7.13% at that auction.
Though Rs. 10,000 million worth of maturing T Bills were on offer at last week’s auction, the market was allowed to subscribe to only Rs. three billion of the same, indicating that the market was asking for higher rates than that which CBSL was prepared to pay.
In the previous week too, though Rs. 9,000 million worth of T Bills were originally on offer for re-issue, the market was allowed to subscribe to only Rs. 2,081 million of those, an indication that then too that the market was asking for higher rates for maturing Treasuries up for reissue.
It was the same story in the October 6 Primary Auction, though Rs. 11,000 million worth of maturing T Bills were originally on offer for reissue, the market was allowed to subscribe to only Rs. 5,932 million of those.
Inflationary pressure coupled with CBSL Economic Research Department’s recent statement that it was happy with inter-bank call money rates at 8% and inflation at below the 10% level helped to push rates since the October 6 primary auction, market sources told this reporter then.
On Tuesday, overnight (O/N) surplus liquidity, based on CBSL’s Wednesday’s open market operations offer was Rs. 26 billion.
The point to point change in the inflationary index was 5.8% last month, 0.8 percentage points more than that in August.
Surplus liquidity has a tendency of bringing down rates and if unchecked, increase inflationary pressure on the economy.
Overnight call money rates on Monday was 8.69%, 69 BPs more than CBSL’s 8% target.
With Christmas round the corner and demand for goods and services rising therein, all those will cause inflationary pressure on the economy, an impact that will help to push up rates further, the sources said.  (See also page 35)