Secondary bond markets turn bullish reflecting parallel shift downwards on overall yield curve

Monday, 12 May 2014 00:00 - - {{hitsCtrl.values.hits}}

By Wealth Trust Securities The healthy external sector performance which reflected a Balance of Payment (BOP) surplus of $ 806 million for the first two months of 2014 coupled with an upgrade to Sri Lanka’s economic growth forecast for 2014 to 7.0% from its earlier forecasted 6.5% by the International Monetary Fund and high speculation on the outcome of this month’s monetary policy announcement saw secondary bond markets turn bullish during the week to reflect an parallel shift downwards on the overall yield curve.

Volumes traded increased during the week as activity spread along the curve from durations of three month bills to eight year bonds. Yields on the longer end of the curve reflected the sharpest decline with the seven year maturity of 1 May 2021 dipping by 23 basis points (bp) week on week to a weekly low 9.68% closely followed by the two 2018 maturities (i.e. 1 April 2018 and 15 August 2018) reflecting dips of 20 bp each to lows of 8.50% and 8.60% respectively and the five year maturity of 1 July 2019 by 12 bp to a weekly low of 8.97%. In addition demand on the shorter end of the curve continued with the 2016 maturities dipping by eight bp week on week to a low of 7.60% and the 2015 maturities dipping by seven bp to a low of 7.23%. Meanwhile, the weekly Treasury bill auction for the week commencing 12 May will be conducted on Monday due to a shortened trading week, at where a total amount of Rs. 12 billion will be on offer consisting of Rs. 2.0 b on the 182 day maturity, Rs. 9.0 b on the market favourite 364 day maturity and Rs. 1.0 billion on the 91 day maturity after a lapse of one week. At last week’s auction, the weighted average (WAvg) on the 182 day maturity dipped by two bp to 7.76% while the WAvg on the 364 day maturity remained unchanged at 7.02% for a third consecutive week. Meanwhile in money markets, overnight call money and repo rates increased marginally to average 6.94% and 6.54% respectively for the week as surplus liquidity in money market decreased marginally to average 12.08 billion for the week. Excess liquidity was continuously drained out during the week by way of repo auctions for durations ranging from four days to 77 days at WAvg’s of 6.60% to 6.81% by the Open Market Operations (OMO) Department of Central Bank.

Rupee gains to 10-month high The USD/LKR rate appreciated considerably during the week to a 10-month high of Rs. 130.42 against its previous week’s closing level of Rs 130.62/65. A decline in importer demand, equity inflows and a drop in forward dollar premiums were seen as the reasons behind this according to market sources. The daily average USD/LKR traded volume for the first four days of the week was at $ 75.45 million. Given are some forward dollar rates that prevailed in the market: one month – 130.93; three months – 131.92; and six months – 133.51.