Foreign holdings in rupee Treasuries continue to surge; hit new high

• Money market liquidity crosses Rs. 300 b mark
• Rupee continues to appreciate 
• Bond market bull run continues; spurred by primary auction results

By Wealth Trust Securities

Foreign investor appetite for rupee-denominated Government securities remained strong, with the market recording a net inflow of Rs. 8.06 billion during the week ended 25 August or an increase of 3.98% week on week from already elevated levels. This marked the 12th consecutive week of net foreign inflows, lifting total foreign holdings of rupee Treasuries to Rs. 210.56 billion, their highest level in almost eight years since November 2018.

Money market liquidity continued to be robust, with the outstanding system liquidity crossing the Rs. 300 billion mark, standing at Rs. 318.13 billion up from Rs. 278.51 billion a week earlier. Incidentally this is the highest level seen in 23 weeks or since March this year. The weighted average Call Money and Repo rates stood at 8.84% and 8.90%, respectively.

Furthermore, the rupee or the USD/LKR rate was seen appreciating, to close the week ending 28 August at Rs. 327.98/328.04 as against its previous week’s closing of Rs. 329.40/329.50. Intraweek the rupee strengthened to a high of Rs. 327.95 from a low of Rs. 329.10.

The average daily USD/LKR traded volume over the first four trading days of the week stood at $ 92.50 million.   

The secondary Bond market last week closed the holiday-shortened week on a firmly bullish footing, with yields dropping lower as buying interest strengthened across the curve.

The week began on a relatively subdued note, with yields initially consolidating as market participants adopted a wait-and-see approach ahead of Tuesday’s Treasury Bond auction. However, the bullish outcomes at the primary auctions helped spur a rally. Firstly, the continued decline in Treasury Bill yields helped reinforce the positive tone in the primary market.

Subsequently, the sentiment shifted decisively on Tuesday, and the bull-run continued as aggressive buying interest emerged both ahead of and following the Bond auction. A positive auction outcome further reinforced market confidence, triggering a broad-based rally that pushed yields lower across several traded maturities.

The momentum carried through to Friday, with yields extending their decline into the close. Persistently elevated surplus system liquidity and sustained foreign investor demand remained the key underlying drivers, keeping overall market sentiment firmly bullish.

The 01.09.28 traded down the range of 10.20%-10.10%. The 15.09.29 and 15.12.29 saw yields decline from intraweek highs of 10.35% and 10.45% to lows of 10.15% and 10.25% respectively.

The 2030 tenors rallied strongly, with the 01.08.30 trading down from an intraweek high of 10.75% to a low of 10.50%, while the 15.10.30 declined from 10.75% to 10.50%. The 01.02.31 followed suit, with its yield dropping from an intraweek high of 10.80% to a low of 10.60%. The 15.12.32 traded down the range of 11.30%-11.00%, while the 01.11.33 traded at 11.35%-11.30% and the 15.10.34 down from 11.72% to 11.55%.

On the longer end, the 15.08.36 traded down from an intraweek high of 12% to a low of 11.80%, while the 01.07.37 traded down the range of 11.98%-11.92%.

As such the yield curve was seen recording a downward shift on the back of healthy activity and transaction volumes.

At last week’s Treasury Bill auction conducted on Monday, weighted averages yields extended their downward trajectory, marking a seventh consecutive week of declines as aggressive demand continued to drive yields lower across all three tenors.

The sharpest moves were seen at the short end, with the 91-day yield falling 16 basis points to 9.06%, while the 182-day Bill also declined by 16 basis points to 9.44%. The 364-day Bill eased by a further two basis points to 9.89%.

Demand remained firmly in the driver’s seat, with the Public Debt Management Office (PDMO) raising the full Rs. 120 billion offered and each tenor meeting its targeted allocation. Total bids amounted to 2.86 times the offer, highlighting the strength of investor appetite. 

This was followed by a round of Treasury Bond auctions conducted last Tuesday, where the entire offered amount of Rs 50.00 billion was raised at the 1st phase of the auction in competitive bidding. The auction recorded a bullish outcome with weighted averages coming below pre-auction rates.

The bids received to accepted amount ratio stood at 4.70 times, posting a relatively high subscription ratio.

 Maturity-wise the results were as follows:

1. The shorter tenor 01.08.30 maturity was issued at a weighted average yield of 10.54%.

2. The 15.03.2035, maturity was issued at the weighted average yield of 11.70%.

(References: Public Debt Management Office - Ministry of Finance, Central Bank of Sri Lanka, Bloomberg E-Bond Trading Platform, Money Broking Companies)