Momentum change reflects parallel shift downwards on yield curve

Monday, 1 July 2013 00:05 - - {{hitsCtrl.values.hits}}

By Wealth Trust Securities The momentum in secondary bond markets turned bullish from bearish during the week following the 200 basis points (bp) cut on the Statutory Reserve Requirement (SRR) for all commercial banks in Sri Lanka. This in turn helped weighted averages (WAvg) at the weekly Treasury bill auction dip considerably. The 364 day bill weighted average (WAvg) reflected the sharpest decline of 19 basis points (bp) to 10.66% while the 182 day bill WAvg dipped by 10 basis points to 9.70%. However the 91 day bill WAvg continued to hold steady at 8.66%.

The more liquid two five year maturities (i.e. 1 April 2018 and 15 August 2018) reflected the sharpest week on week declines of 21 bp and 18 bp respectively to close the week at levels of 11.26/28 and 11.33/37. This was subsequent to hitting weekly lows of 11.15% and 11.24% respectively against its highs of 11.65% and 11.73% in a week where volatility and volumes traded were very high. It was seen closing the week lower than its previous weeks closing levels as well, as the downward trend was further supported by the announcement of inflation figures for the month of June, which reflected an deceleration on both the point to point and the annualised average to 6.80% and 8.60% respectively.

The overnight call money and repo rates edged up marginally on Friday as net market liquidity reversed back to a negative on Friday due to settlements for the weekly Treasury bill auction. However it is widely anticipated that liquidity will reverse back to a positive on Monday 1 July due to the SRR adjustment, which is expected to bring in around Rs. 58 b in to the system. In line with this, the Open Market Operations (OMO) department of Central Bank was seen conducting two auctions for outright sales of Treasury bills for a total amount of Rs. 10 b in an effort to mop up liquidity on a permanent basis for durations of 39 days and 46 days at WAvg of 8.42% and 8.47% respectively, value dated 1 July. In addition, daily Repo auctions were conducted during the first four days while a reverse repo auction was conducted on Friday. Overnight call

money and Repo rates were seen averaging 8.59% and 8.16% respectively for the week. Rupee loses ground during the week The rupee depreciated during the week against its last week’s closing levels of Rs.128.90/95 to a weekly low of Rs. 130.65 on Thursday. However it closed the week marginally higher at Rs 130.40/50 subsequent to gaining to a high of Rs. 130 as well. Foreign selling and forward hedging on rupee bond positions coupled with importer demand was seen as the reasons behind the depreciation

according to market sources. The daily USD/LKR average traded volume for the first four days of this week stood at US$ 81.44 million. Some of the forward dollar rates that prevailed in the market were: one month – 131.17; three months – 132.45; and six months – 134.40.