Bond markets bullish despite inflation reflecting a turnaround

Friday, 1 August 2014 00:43 - - {{hitsCtrl.values.hits}}

By Wealth Trust Securities Despite inflation on a point to point basis increasing to 3.6% in July from 2.8% recorded in June while its annualised average continued to decrease for a 47th consecutive month to 4.70% against its previous month of 4.90%, secondary bond markets remained bullish, as buying interest on selective durations kept overall yields at bay yesterday. Buying interest on the five-year duration of 1 July 2019 and the nine-and-a-half year duration of 1 January 2024 saw its yields dip to intraday lows of 7.27% and 8.30% respectively against its opening highs of 7.35% and 8.40%. However, selling interest on the two 2018 maturities (i.e. 1 April 2018 and 15 August 2018) and the eight-year maturity of 1 July 2022 to intraday highs of 7.17%, 7.23% and 8.11% respectively against its opening lows of 7.15%, 7.18% and 8.07% curtailed any further downward movement on the selective durations. Meanwhile, on the longer end of the yield curve, yields on the two 2029 maturities (i.e. 1 January 2029 and 1 May 2029) were seen dipping as well to close the day at levels of 9.30/35 each respectively against its days opening highs of 9.40%. Meanwhile in secondary bill markets, October 2014 and June 2014 maturities were seen changing hands at levels of 6.35% to 6.40% and 6.48% to 6.50% respectively while the 364 day bill was quoted at levels of 6.50/55.

Meanwhile in money markets, overnight call money and repo rates remained steady to average 6.71% and 6.53% respectively as overall surplus liquidity stood at Rs.36.22 billion yesterday. The total amount was deposited at Central Bank’s Standing Deposit Facility Rate (SDFR) of 6.50% as no cash valued auctions under Open Market Operations (OMO) were conducted yesterday. However the OMO department was seen mopping up an amount of Rs. 50.15 billion via three term repo auctions at a single yield of 6.51% for 35 days, 56 days and 77 days, valued today. Rupee remains steady for a fourth consecutive day In Forex markets, the USD/LKR rate remained steady for a fourth consecutive day to close the day at Rs. 130.21/130.23 as markets continued to be at equilibrium. The total USD/LKR traded volumes for 30 July stood at $ 61.45 million. Some of the forward dollar rates that prevailed in the market were: one month – 130.47; three months – 131.02; and six months – 132.07. Rupee ends steady on State banks’ dollar buying Reuters: The rupee closed steady on Thursday as dollar-buying by two State banks prevented sharp gains in the local currency due to inflows from inward remittances and exporter dollar sales amid mild importer demand for the greenback, dealers said. The rupee ended at 130.21/22 per dollar, unchanged from Wednesday’s close. Dealers said the rupee is still facing an upward pressure with the two State banks buying dollars at 130.21 rupees. Usually the Central Bank intervenes through the two state banks to direct the market to smoothen volatility. But dealers said it was not clear if the state bank buying was on behalf of the Central Bank. The International Monetary Fund (IMF) on Wednesday urged Sri Lanka to limit its intervention in the foreign exchange market. The IMF said the Central Bank’s intervention in the foreign exchange market may create a perception that the rupee was implicitly fixed and could lead market participants and firms to hold un-hedged foreign exchange risk on their balance sheets. The Central Bank has absorbed more than $750 million from the market to prevent a sharp appreciation and support exporters. Finance Secretary P.B. Jayasundera said last week that Sri Lanka was building up its foreign exchange reserves while keeping its currency stable as the island nation sees more dollar inflows. Jayasundera attributed the increased inflows, which the central bank has been absorbing, to a rise in inflows from exports, tourism and remittances. Dealers had been expecting the rupee to appreciate due to weak growth in imports and private sector credit, despite multi-year low interest rates.