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Govt. securities market turns a corner

T-bill yields in primary market decline for first time since mid-May
Milestone in market recovery following CBSL’s 100 basis point policy rate hike
Improvement driven by improved market confidence following US-Iran peace deal

The Government securities market turned a corner last week as Treasury bill (T-bill) yields in the primary market declined for the first time since mid-May, marking a significant milestone in the market’s recovery from the panic that had gripped it following the Central Bank of Sri Lanka’s (CBSL) 100 basis point policy rate hike last month.

The improvement was driven by improved market confidence following the announcement of the US-Iran peace deal, with the Public Debt Management Office (PDMO) also selling the entire stock of T-bills on offer at the mid-week auction for the first time since mid-May, a notable achievement given the continued sharp decline in market liquidity.

According to statistics published by the CBSL, market liquidity has fallen further to Rs. 40.1 billion as of 16 June, down from Rs. 59.2 billion on 9 June and sharply lower than the Rs. 181.68 billion recorded on 19 May.

Data published by the PDMO revealed that bids totalling Rs. 129.4 billion were received at the auction held on Wednesday (17) against Rs. 70 billion on offer. The PDMO accepted the full Rs. 70 billion on offer, marking the first full acceptance of the offered stock since mid-May.

T-bill yields retreated across most maturities. The three-month T-bill fell by 7 basis points to a Weighted Average Yield Rate (WAYR) of 10.02%, while the six-month fell by 11 basis points to 10.16%. The 12-month T-bill held steady, with its WAYR unchanged at 10.16%.

This marks a significant shift from the volatility that had gripped the market in recent weeks, which had been precipitated by the 100 basis point increase in policy rates introduced by the CBSL last month.

Certain experts had been of the view that the CBSL had overreacted with the 100 basis point increase, adding that the currency would have settled on its own, and had noted that it would take time for the market to stabilise.

At last week’s auction, bids worth Rs. 51.6 billion were accepted out of Rs. 68.8 billion received for three-month bills against Rs. 35 billion on offer at a WAYR of 10.02%, down 7 basis points from the previous auction.

Similarly, Rs. 8.7 billion was accepted out of Rs. 40.1 billion in bids for six-month bills against Rs. 25 billion on offer at a WAYR of 10.16%, down 11 basis points from the previous auction.

Meanwhile, Rs. 9.6 billion was accepted out of Rs. 20.6 billion in bids for 12-month bills against Rs. 10 billion on offer at a WAYR of 10.16%, unchanged from the previous auction.