Secondary Bond market yields drop following Policy Rate cut

• Rs. 157.50 b T-Bill auction fully subscribed; rates dip on longer tenors
• Money market liquidity steady
• Foreign holdings in Rupee treasuries rebounds
• Rupee see-saws; closes down

By WealthTrust Securities

The Secondary Bond market last week saw rates initially move up on the back of a combination of profit-taking pressure, the news that the Ceylon Electricity Board (CEB) seeks to revise electricity tariffs, and some market participants adopting a risk-off approach ahead of Monetary Policy Review No. 3 of 2025. However, following the 25-basis point rate cut to the Overnight Policy announced by the Central Bank of Sri Lanka, rates recovered and the market rallied. Aggressive buying interest was seen at the tail-end of the week, pushing yields to fresh lows. Overall market activity and transaction volumes were seen at healthy levels.

The 15.09.27 maturity traded down the range of 9.20%-9.15%. The 15.02.28 and 01.07.28 maturities were seen trading down from intraweek high to lows of 9.64%-9.45% and 9.73%-9.60% respectively. The 15.06.29, 15.09.29 and 15.12.29 maturities were seen trading down the ranges of 10.10%-9.95%, 10.15%-10.00% and 10.20%-9.99% respectively. The 15.03.31 and 01.11.33 maturities were seen trading down from intraweek highs to lows of 10.72% to 10.45% and 11.00%-10.80% respectively.

As a result, the yield curve was seen shifting lower.

The weekly Treasury Bill auction conducted last Wednesday (21 May) was fully subscribed. The entire Rs, 157.50 billion offered was successfully raised in the first phase in competitive bidding. The total bids received exceeded the offered amount by 2.40 times. The auction saw weighted average yield rates decline marginally on the longer tenors. Accordingly, the rates on the 182-day and 364-day maturities dropped by 1 basis point each to 7.97% and 8.29% respectively. However, the 91-day maturity saw rates remain unchanged at 7.65%. The second phase was also fully subscribed: 10% of total offered amount at Phase 1 or Rs, 15.75 Bn was raised, being the maximum offered.

The foreign holding in Rupee Treasuries recorded a net inflow, following two consecutive weeks of net outflows, amounting to Rs. 0.55 billion and as a result the total holding increased to Rs. 90.22 billion as at 23 May 2025.

The daily secondary market Treasury Bond/Bill transacted volumes for the first four days of the week averaged at Rs. 27.77 billion. 

The total outstanding liquidity surplus in the inter-bank money market closed broadly steady at Rs. 157.78 billion as at the week ending 23 May, from Rs. 157.85 billion recorded the previous week. The weighted average interest rates on call money and repo were recorded within the ranges of 7.75%-7.98% and 7.75%-7.98% respectively. 

The Central Bank of Sri Lanka’s (CBSL) holding of Government Securities was registered at Rs. 2,509.42 billion as at 23 May, unchanged from the previous week’s closing level.

Forex market

In the Forex market, the USD/LKR rate on spot contracts was seen depreciating, to close the week at Rs. 299.40/299.45 as against the previous week’s closing level of Rs. 299.10/299.30 and subsequent to trading at a high of Rs. 299.15 and a low of Rs. 301.25.

The daily USD/LKR average traded volume for the first four trading days of the week stood at $ 94.01 million. 

 (References: Central Bank of Sri Lanka, Bloomberg E-Bond trading platform, Money broking companies)