ECONOMYNEXT – Sri Lanka bond yields fell across maturities Monday while the rupee was quoted slightly weaker against the US dollar, dealers said amid high levels of excess liquidity in interbank markets.
The spot US dollar was quoted at 296.00/05 to the US dollar, slightly weaker from 295.40/45 to the US dollar.
Amid high excess liquidity, minimum overnight interbank has fallen below the 8.0 percent ‘single policy rate’, a phenomenon known as falling through the floor in a regime with a true single rate which is a floor rate.
The falling through bottom happens due to market participants who do not have access to the central bank deposit window lending at lower rates in an abundant reserve regime.
Such transactions are generally expected to be arbitraged by participants who do have access to the window.
But Sri Lanka’s floor rate is actually 7.50 percent.
Since the collapse of the housing bubble fired by the Federal Reserve several advanced nations – which now have high inflation and political instability with busted government finances – have operated ‘single’ policy rates with excess liquidity.
Analysts have urged a return to a scarce reserve regime where the interbank market functions reflecting counter party risks and forex shortages do not emerge, and second sovereign default does not take place.
Excess liquidity develops in a pegged exchange regime (when money is not printed) as dollars a purchased by the monetary authority amid weak domestic credit.
The liquidity will remain until it is turned into credit and imports, unless they are mopped up and foreign reserves locked by the central bank, which may require a slightly higher interest rate structure.
However excess liquidity can also be created through dollar rupee swaps, which can lead to mis-targeting of rates in the same as inflationary open market operations do.
Sri Lanka has also increased taxes and reduced government borrowings which release more money for private credit. A stable currency also preserve the real value of savings or financial capital.
On Monday a bond maturing on 15.12.2026 was quoted at 8.65/70 down from at 8.66/77 percent Friday.
A bond maturing on 15.09.2027 was quoted at 9.30/40 down from 9.40/48 percent.
A bond maturing on 01.07.2028 was quoted at 09.95/10.05 closed at 10.10/17 percent, down from 10.15/18 percent.
A bond maturing on 01.09.2028 was quoted at 10.00/05 closed at 10.15/20 percent.
A bond maturing on 15.10.2028 was quoted at 10.05.10 closed at 10.17/23 percent, down from 10.25/30 percent.
A bond maturing on 15.12.2029 was quoted 10.45/50 closed at 10.60/66 percent, down from 10.62/68 percent.
A bond maturing on 15.10.2030 was quoted 10.65/75 closed at 10.75/81 percent, down from 10.89/92 percent.
A bond maturing on 15.12.2032 was quoted at 11.20/30 closed at 11.24/35 percent, down from 11.33/40 percent. (Colombo/Mar17/2025)
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