Tuesday Sep 22, 2026
Tuesday Sep 22, 2026
Tuesday, 22 September 2026 06:22 - - {{hitsCtrl.values.hits}}
Rising Bond yields in the US, UK, and Japan are making it harder for smaller markets such as Sri Lanka to attract capital, Frontier Research said in its weekly market note, as the world’s major central banks turn broadly hawkish in response to persistent inflation.
The US 10-year Treasury yield touched 5.04% on 15 September, its highest level since July 2007, while the UK 10-year gilt yield rose to 5.378% on Thursday, also a post-2007 high. Japan’s 10-year yield reached 3% last week for the first time since 1996.
Higher Japanese rates were also seen reducing the appeal of yen-funded carry trades that have long supported flows into emerging markets, an effect Frontier Research said was already visible in the region, with India’s 10-year yield rising to near a four-month high.
The tightening comes as the Federal Reserve raised its rate for the first time since 2023 last week, lifting it a quarter point to a range of 3.75% to 4%, with 16 of 18 officials projecting a further hike this year.
The Fed now expects inflation to return to its 2% target only in 2029, the research house said, citing tariffs, the Iran-war energy shock, and heavy spending on artificial intelligence (AI) infrastructure as key drivers of persistent price pressure.
The Bank of Japan raised its rate to 1.25%, its highest since 1995, while the Bank of England held its rate at 3.75% in a 6-3 vote, with UK inflation at 3.1% in August. The European Central Bank had raised its rate the week before.
Sri Lanka faces similar pressures domestically. Inflation reached 8% in August, a three-year high and the second consecutive month above the Central Bank of Sri Lanka’s (CBSL) upper target limit, Frontier Research said.
The current account has remained in deficit for four months, largely reflecting the higher cost of fuel imports. Brent crude stood at $ 106 a barrel in mid-September, though prices eased late last week after Saudi Arabia moved to restore shipments through a damaged pipeline.
The CBSL’s next monetary policy decision is due at the end of this month, following a 100-basis-point rate hike to 8.75% in May.
Frontier Research added that weaker consumer sentiment in the US and UK, where households increasingly expect prices to keep rising, could weigh on Sri Lanka’s tourism earnings by curbing foreign travel spending. However, it noted that strong workers’ remittance inflows may help offset the pressure on the current account.
Workers’ remittances rose 10% year-on-year (YoY) to $ 748.6 million in August, easing 3.7% from July’s record $ 777.6 million but still marking one of the strongest monthly inflows on record. Cumulative remittances for the first eight months of 2026 climbed 20% YoY to over $ 6.13 billion, the strongest January-August performance in Sri Lanka’s history, helping offset pressure on the current account from costlier fuel imports.
The tighter global environment is already showing up unevenly across Sri Lanka’s capital flows. CBSL data showed net inflows into the Government securities market amounted to $ 137.5 million during the first seven months of 2026, up from $ 107.4 million a year ago.
However, the Colombo stock market recorded a net outflow of $ 107.4 million over the same period, a sharp deterioration from the $ 54 million net inflow a year earlier.
Foreign direct investment (FDI) has also softened. Sri Lanka’s Board of Investment (BOI) said the country received approximately $ 450 million in realised FDI during the first half of 2026, down 11% from over $ 507 million in the corresponding period of 2025, when inflows had surged 101% YoY.
