Significant parallel shift downwards of yield curve ahead of monetary policy announcement

Monday, 9 December 2013 00:00 - - {{hitsCtrl.values.hits}}

By Wealth Trust Securities Secondary market bond yields plunged during the week ignited by speculation of the outcome of this month’s monitory policy announcement due on Monday 9 December. The drop in secondary market bond yields were further fuelled by the outcome of the weekly Treasury bill auction where the weighted average’s declined for the eleventh consecutive week to 7.97%, 8.65% and 9.50% respectively of the 91-day, 182-day and 364-day bill maturities.

The most actively traded securities happened to be the two liquid 5-year maturities (i.e. 01.04.2018 and 15.08.2018) whose yields declined sharply by 71 bps and 76 bps to 10.25% and 10.28% respectively, which happen to be the lowest yields seen over the past 22 months. This trend was closely followed by the 3-year maturity of 01.01.2017 which declined by 50 bps the two year maturity of 15.07.2015 which declined by 30 bps and the 1.5 year maturity of 01.04.2016 which declined by 40 bps. However, considerable selling interest coupled with profit taking resulted in the overall yields increasing once again towards the latter part of the week.

In the secondary bill market, demand throughout the week resulted in January 2014 bills changing hands within the range of 7.75% to 8.05%. May 2014 at levels of 8.40% to 8.60%, October 2014 within 8.90% to 9.30% and the latest 364 day bill at levels of 9.10% to 9.30%. Meanwhile, the overnight call money and repo rates remained steady throughout the week to average 7.77% and 7.08 % respectively as surplus liquidity in the market increased to average Rs. 24.97 billion. The Open Market Operations (OMO) Department of Central Bank was seen mopping up liquidity during the week by way of seven-day term repo auctions at weighted averages ranging from 7.43% to 7.44%. In addition, its effort to drain out a further Rs. 15 billion by way of term repo auctions for periods of 31 and 60 days was unsuccessful as no bids were

received. Rupee gains to a one month high Seasonal Inflows coupled with export conversions outweighing importer demand saw the USD/LKR rate gain to a one month high of Rs. 130.77 during the week. The daily average USD/LKR traded volume for the first four days of the week was at $ 63.45 million. The following are some forward dollar rates that prevailed in the market: 1-Month: Rs. 131.48, 3-Months: Rs. 132.83, 6-Months: Rs. 134.78.