Secondary market bond yield curve reflects a parallel shift downwards to levels last seen 12 months

By Wealth Trust Securities

Along with the announcement of the term reverse repo auctions and the outcome of the weekly Treasury bill auction which reflected a decrease for a fourth straight week, the secondary market yield curve took a parallel shift downwards as the five year maturity reflected the sharpest decrease of 130 bp to a weekly low of 10.60% while the four-year bond decreased by 120 bp to a low of 10.60% as well.

In addition the one-year and the two-year bonds decreased by 85 bp and 110 bp as well to weekly lows of 10.80% and 10.70% respectively.

Furthermore considerable volumes on the 364 day bill and 182 day bill were seen changing hands at levels of 10.75% to 11.00%, and 10.35% to 10.75% respectively, reproducing further demand for secondary market bills. Such levels in secondary markets was last seen towards the end of January 2012 and this in turn saw the present yield curve reflecting an inversion as the longer tenure bond yields were trading well below the weighted average of the 364-day bill.

However the decreasing trend came to a halt with rates even picking up marginally during the latter part of the week due to profit taking at these levels coupled with the wait and see approach by market participants ahead of the proposed Treasury bond auction held for the first time in five months for durations of five years, eight years and 15 years, which will be conducted on 10 January.

Liquidity concerns ease during the week

Meanwhile concerns over money market liquidity eased off during the week as Central bank indicated their wiliness to conduct regular term auctions in order to address structural liquidity needs of the system as stated at its Road Map for 2013.

The Open Market Operations (OMO) Department of the Central Bank conducted a 12 day reverse repo auction on 2 January for an amount of Rs. 12.5 b and accepted the same amount at a weighted average of 9.48% while it further offered Rs. 10 billion for a 30 days period on 4 January and accepted the same amount at a weighted average of 9.56%. However this was not a fresh injection of liquidity as Rs. 20 b of previous auctions matured during the week.

Furthermore, the OMO Department also injected funds on an overnight basis while Central Bank injected funds through its reverse repo window of 9.50%, as net market liquidity closed the week at a deficit of Rs. 11.54 billion. This is turn saw overnight call money and repo rates ease marginally during the week to average 9.83% and 9.03% respectively.

Rupee gains during the week

The rupee was seen fluctuating within a band of Rs. 127.15 to Rs. 128 during the week. The USD/LKR rate was seen appreciating during the latter part of the week on the back of a drop on forward dollar premiums and some foreign exchange relaxations offered by the Central Bank at its Road Map for 2013.

The total dollar/rupee volume for the previous day (3 January 2013) was US$ 37.15 million. Some of the forward dollar rates that prevailed in the market were one month – 128.39; three months – 130.04; and six months – 132.59.