Sri Lanka Treasuries auction fails over re-structuring fears


ECONOMYNEXT – Sri Lanka sold 65 billion rupees of Treasury bills after offering 85 billion rupees at this week’s auction with yields rising and 22 percent of the offer unsold, data from the state debt office showed.

The debt office offered 35 billion rupees of 3-month bills and sold 60 billion with average yield rising 71 basis points to 28.43 percent.

25 billion rupees of 6-month bills were offered by only 1.6 billion rupees was sold with the yield kept unchanged at 28.97 percent.

25 billion rupees of 12 month bills were sold at a weighted average yield of 29.15 percent, down 04 basis points.

Sri Lanka had a series of successful Treasuries auctions after rates were allowed to go up and yields were gently falling when speculation intensified that rupee bonds would face a second ‘hair cut’.

When a currency falls and prices go up the economy inflates, bringing down the real value of the debt in an automatic debt sustainability.

However there had been speculation that foreign bond holders, who are protected by dollar denomination would demand a second hair cut from rupee bond holders whose dollar value has almost halved, leading to uncertainty.

Sri Lanka defaulted after its non-credible reserve collecting soft-peg (now called a flexible exchange rate) which is neither a clean float nor a consistent or hard peg, broke due to unsustainable policy rates.

Sri Lanka started employing aggressive open market operations to suppress rates from around 2011, and the currency has collapsed from 113 to 360 over 11 years, despite the country being at peace.

Aggressive open market operations worsened after 2015 with flexible inflation targeting leading to 3 currency crises over 6 years. The third currency crisis is now it is third year. (Colombo/Aug09/2022)

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