Bullish sentiment continues in bond markets as term liquidity returns

By Wealth Trust Securities

The positive momentum in bond markets remained during the week following CBSL’s cut on policy rates last Friday as fresh liquidity was injected into the system on a term basis during the week.

The Open Market Operations (OMO) Department of Central Bank offered and accepted an amount of Rs. 10 billion through an 11-day term reverse-repo auction held on Friday for the first time in four months at a weighted average of 8.28% which was five basis points lower than the average overnight repo rate for the week.

Furthermore, net market liquidity was seen reversing from a positive during the first two days of the week to a negative over the next three days which led to the OMO department injecting funds into the system on an overnight basis as well by way of daily reverse-repo auctions. The Central Bank’s discount window rate of 9.0% was also accessed during the week. This in turn helped overnight call money and repo rates to average 9.0% and 8.33% for the week.

The yields on the more liquid two five-year maturities (i.e. 01.04.2018 and 15.08.2018) were seen fluctuating within the range of 10.90% to 11.05% and 10.95% to 11.10% respectively during the week as activity remained high across the yield curve during the week as well.  Two-year bonds were seen changing hands within the range of 10.75% to 10.80%, three years within 10.78% to 10.85%, four-year within 10.65% to 10.80% and the eight-year within 11.50% to 11.60%. The dip in weighted averages at the weekly Treasury bill auction and expected further decline over the next few weeks kept bullish sentiments alive throughout the week.

Rupee fluctuates during the week

The USD/LKR rate appreciated during the week to a one month high of Rs. 125.68 against its previous week’s closing level of Rs. 126.15 before closing the week lower at Rs. 126.35. Tight liquidity coupled with a narrowing of forward dollar premiums was seen as the reason behind the appreciation while importer demand was attributed for the dip by week end.

The total USD/LKR traded volume for the first four days of this week stood at US$ 53.04 million.

Some of the forward dollar rates that prevailed in the market were: One-month: Rs. 127.29; Three-months: Rs. 128.94 and Six-months: Rs. 131.44.