ER Party Over

With foreign inflows into the Treasury (T) Bond and Bill market complete (see also the lead story on this  page), the exchange rate (ER) weakened at Friday’s trading, a market source told this newspaper.As a result, the ER which closed the previous day Thursday at the Rs. 126.00/126.10 levels in two way quotes in interbank spot trading against the US dollar ($),  finished last week at the Rs. 126.20 level, he said.
However on Thursday, the ER made gains over that of Wednesday’s closing, even going below the Rs. 126 mark to be quoted at the Rs. 125.80 level in interbank spot trading against the $, before “stabilizing” at the Rs. 126.00/126.10 levels in two way quotes,  the source said.
Foreign inflows into the T Bills and Bond market are generally attributed as the reason behind the strengthening of the ER.
Central Bank of Sri Lanka  (CBSL) data showed that week on week, foreign investments in T Bills and T Bonds increased by Rs. 3,291 million (US$ ($) 25.7 million*) by the week ended Wednesday (January 9). With those purchases, and foreign holdings in T Bills and T Bonds outstanding now amounting to 12.5% (Rs. 401,080 million) of its (T Bills & Bonds) total outstanding, ie the maximum limited permitted by CBSL for foreigners to invest in such outstanding amounts.
Meanwhile Thursday’s T Bond auction, which was the first T Bond auction for the year, saw T Bonds of 1.4.18. maturity on offer fetching a weighted average yield (WAY) per annum net of tax of 10.9%, that of 1.5.2021 maturity: 11.64% and that of 1.7.2028 maturity: 12.25%, according to a CBSL press release.
“A mix of market players, foreigners and captive funds (an example of which may be the EPF) were involved n buying those T Bonds, a market source said. But on Friday with foreigners having had reached their maximum limits, yields on T Bonds and T Bills remained unchanged, though trading did take place, the source said.
With reference to Thursday’s T Bond auction, the source said that T Bonds of 1.5.2021. and 1.7.2028. maturities which were also on offer, however are hardly subjected to secondary market trading, but the 2018 which was heavily traded that day, saw its yields plunge by 60 basis points (bps) to 10.30% on Thursday itself, he said.
However T Bonds and Bills of 2014 maturities were trading 40 bps higher, at 10.70%, he said.
Generally however the market operates on the basis of longer the tenure higher the yield and not vice versa. Meanwhile the WAY of T Bills of one year tenure (364 days)-net of tax declined by three bps to 11.38% at Wednesday’s T Bill auction.
In other developments, the ER made gains by over a rupee at Wednesday’s (January 9) trading on the back of speculation that foreign money has come into the market in preparation for foreign subscription of a T Bond auction that took place the following day Thursday (January 10),  the source said.
As a result, the ER strengthened to Rs. 126 in interbank spot trading against the $, up from the previous day’s two way quotes of Rs. 127/20/30.
Meanwhile on the previous day Tuesday too the ER gained ground, this time by 10 Sri Lanka cents to be quoted at the Rs. 127/20/30 level in two way quotes in spot, interbank trading against the $ on thin volumes, he said. At the beginning of last week on Monday, the ER held its ground at the Rs. 127/30/40** levels in two way quotes in spot, interbank trading against the $, despite state buying $s in nominal quantities, the source said.
The state generally enters the market, such as through its agent Bank of Ceylon, to meet certain of its external obligations, like collecting $s for the settlement of an oil bill, or for foreign debt servicing or to meet a defence stores’ bill.
In  the meantime, in  secondary market trading, T Bonds and Bill yields across all maturities increased by around 30 bps on an average at the beginning of last week, ie at Monday’s (January 7) trading, reversing the trend witnessed in the previous week, of yields’ contractions, the source said.
He attributed this to a correction. As a result, yields of T Bills and Bonds maturing in a year’s time went up by 35 bps to 11.15% and that of T Bonds maturing on 2018 by 40 bps to 11.20% on Monday, he  said.***
The following day Tuesday, T Bills and Bonds of 2014 maturity saw their yields increase by a further 10 bps to 11.25%. However T Bonds of 2018 maturity, on the back of foreign interest, saw their yields contract by 20 bps to 11%.
On Wednesday, yields of T Bonds of 2018 maturity further contracted by 10 bps to 10.90%, with others of similar tenures following suit.
Yields of T Bonds and Bills of shorter tenures were trading in line with Wednesday’s T Bill auction results, where the weighted average yields (WAYs) of T Bills and Bonds maturing after 91 and 364 days fell by three bps each to 9.88% and 11.35% respectively, and that of 182 days by 18 bps to 10.81%.
The source also said that the previous week’s rapid declines in yields across the board (see also the business pages of last week’s issue of The Sunday Leader) were due to panic buying, coinciding with that week’s T Bill auction where yields declined steeply.
T Bills of one year tenure at the previous week’s auction fetched a 11.38% WAY, but were still 38 bps higher than the yield of 2018 maturity fetched at Tuesday’s trading.
However, generally, due to the perceived risk factor, longer the tenure, higher the yield and not vice versa as has happened in the aforesaid case. In respect of CBSL banning foreign investments in T Bills and Bonds of short tenures, ie restricting such investments to T Bonds of 2018 maturity and beyond (longer maturities) for new issues, the source said that this was because the Government was after long term foreign money. Previously foreigners were even allowed to invest in T Bills as short as of a 91 day maturity.
* Assuming that 1$= Rs. 128 in interbank spot trading.
**Last week’s business pages of The Sunday Leader reported that the ER in two way quotes was being traded at the Rs. 127.25/35 levels as at January 4.
*** This newspaper, on its last week’s business pages, reported that T Bills and Bonds of 2014 maturity were commanding yields of 10.90% and that of 2018 maturity 10.60% at last Friday’s (January 4) trading.