Rates Continue To Rise

Last week’s weekly Treasury (T) Bill auction saw  yields continuing with their upward ascent, with the weighted average yields (WAYs) for 182 and 364 day T Bills rising by seven and four basis points (bps) to 13.02% and 13.27% respectively.
However the WAY for the 91 day T Bill stagnated at the 11.36% level, which a market source said was due to the demand for short term investments by the market in lieu of the forthcoming festive season and the expenditure associated with such. Correspondingly when demand is slack for a particular tenure it attracts higher rates in order to make it attractive in the eyes of the investor to make it marketable.
Reissuing/issuing of T Bills to the market is an instrument used by governments (in this instance the Government of Sri Lanka (GoSL)) to raise money locally to fund its expenses programme! When rates (WAYs) of such go up, that means GoSL’s borrowing costs too will have had gone up by an equal amount.
State owned Central Bank of Sri Lanka (CBSL), already burdened with over Rs. 200 billion worth of T Bill stock, has very little manoevrability to intervene in the market and bridle rates in such T Bill auctions and therewith GoSL’s borrowing costs.
Bridling and/ or bringing down T Bill rates also has a cascading effect on market interest rates. Market interest rates generally move up or down “in tandem” with T Bill rates, where the latter rates are generally referred to as the benchmark rates.
Generally there is no fear of default from such T Bill investments, because if it comes to a crunch, CBSL may print new money to meet such liabilities.
As such investments in T Bills and T Bonds are considered risk free. At last week’s auction, originally, GoSL had earmarked Rs. 13,000 million worth of maturing T Bills for reissue, but ended up selling only Rs. 12,737 million of those to the market. It’s unclear whether the deficit of Rs. 263 million was retired, or whether, captive funds such as the EPF invested in the same at administered rates or whether the CBSL itself invested in such, by issuing new, printed money to GoSl in lieu.
The danger in flooding the market with printed money, especially when such is not backed by an equivalent amount of foreign inflows, is that that may fuel inflationary pressure on the economy, ie tending prices to go up, based on the principle of too much of money chasing after too fewer goods. That in turn hits the poor and the fixed wage earner the hardest.