Sri Lankan bond yields were marginally higher on Friday, according to dealers, after a price control on gilt yields was abolished, which kept bond buyers away from auctions, resulting in large-scale liquidity injections and FX shortages.
According to dealers, a 01.12.2024 bond traded for 8.24 percent on Friday and was quoted at 8.10/30 percent in late morning trade.
After trading at about 7.98 percent, the bond was quoted around 8.00/20 levels after the price limitation was withdrawn on Thursday.
Bill price limits were enforced in April 2020, resulting in wide-scale liquidity injections as private credit rebounded later in the face of a significant budget deficit.
Bond market activity rapidly dwindled as foreign reserves declined and excess liquidity exited in reserve outflows as convertibility was given, and just one or two maturities around 2024-2026 were traded.
However, there was significant demand in a 2031 auctioned bond with a yield of somewhat more than 10%.
As foreign reserves depleted, the central bank stopped participating in the market for trade transactions (suspended convertibility), causing the rupee to gradually sink to 226/230 levels.
Interbank spot trading was also prohibited, and banks began to only match clients internally, as well as begin dollar rationing.
Despite the lifting of convertibility and continuing injections, banks were instructed not to sell dollars above 203 to the US dollar.
According to market players, importers are now compelled to chase after dollars themselves and encourage exporters to sell to them.
While banks settle transactions at the agreed-upon rate, importers pay additional fees individually.
According to market participants, confidence is low in forex markets, and the 230-to-US-dollar rate is also a source of psychological resistance.
Low rupee interest rates promoted dollar deposits, while money printing allowed rupee borrowings without compensating credit to other sectors to keep the external sector balanced.
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