Secondary bond markets remain resilient despite policy rates being held steady

Monday, 22 April 2013 00:00 - - {{hitsCtrl.values.hits}}

By Wealth Trust Securities

The secondary market for Treasury bills and bonds started the week with the much-awaited monetary policy announcement decision where the Central Bank kept its policy rates unchanged at 7.50% and 9.50% for a fourth consecutive month against some market expectations.

Nevertheless, the Central Bank indicated there would be room for interest rates to drop on the back of expected adjustments to administratively determined prices and continued fiscal consolidation, which in turn would reduce the dependence of the public sector on bank financing in the coming months. It also said that a further deceleration of demand driven inflation on a sustainable basis would provide space for further easing of monetary policy.

On the following day over Rs. 14 b in total was accepted for the first time in six weeks against its initial total offered amount of Rs. 8 b at the weekly Treasury bill auction. However this was amid a declining trend in weighted averages as all three maturities reflected a dip of one basis point (bp) each.

In secondary bond markets, yields on the eight-year maturity was seen increasing by around 10 bp during the week to a weekly high of 11.80% on the back of some market participants reducing their duration by selling the longer tenure and buying the 364 day bill.

However, yields on the overall curve remained rather stagnant during the week with the liquid five year maturity closing the week at 11.40/42. Given are the closing, secondary market yields for the most frequently traded maturities.

Meanwhile in money market, overnight call money and repo rates remained resilient at levels of 9.45% to 9.55 % and 8.55% to 8.75% respectively during the week despite surplus liquidity in the system seesawing from a low of Rs. 17.3 billion to a high of Rs. 39.1 billion during the period of the last five days.

The Central Bank continued the practice of conducting daily repo auctions throughout the week in order to drain out excess liquidity from the system at a steady weighted average of 8.35% in addition to a total amount of Rs. 4.75 billion being mopped up as well for durations of 14 days and 21 days at weighted averages of 8.76% and 8.85% respectively by way of outright sales of Treasury bills.

Rupee lost ground during the week

The rupee depreciated during the week against its last week’s closing levels of Rs.125.35 to a two-week low of Rs. 126 on Friday on the back of demand for forward dollar contracts. The total USD/LKR traded volume for the first three days of this week stood at US$ 63.68 million. Given are some forward dollar rates that prevailed in the market: one month – 127.14; three months – 129.17; six months – 132.12.