Thursday, December 13, 2012

Unexpected policy easing sends market on a bull run

Policy rates cut for the first time in two years

By Wealth Trust Securities

 The surprise easing of monetary policy by way of the Central Bank reducing its policy rates by 25 basis points (bp) at its monthly monetary board meeting for December saw the primary and secondary markets on Treasury bills and bonds take a bull run yesterday as yields dipped considerably.

At the weekly primary Treasury bill auction, weighted averages stumbled across all three maturities with the 364 day bill reflecting the sharpest decline of 41 bp to 12.45%, while the 91 day and 182 day bills dipped by 35 bp and 32 bp respectively to 10.44% and 11.78%.

 As is the trend when rates are on a declining path, attention shifted away from the 182 day maturity to the 364 day maturity at the auction as 63% of the total accepted amount was represented by this maturity.

 Meanwhile, in secondary bond markets, yields reflected a similar dip mainly on the more liquid three year, five year and six year maturities. The six year maturity opened the day at levels of 12.80% to 12.85%, down from its previous day’s closing levels of 13.35% subsequent to the policy announcement and edged up to an intraday high of 13.05% on the back of profit taking. However buying interest at these levels saw its yields dip once again to close the day at levels of 12.80%-12.85%.

 Furthermore the three year maturity was seen been traded within the range of 12.25%-12.35%, while the five year was seen changing hands within the range of 12.50%-12.60%. In addition, secondary market bills was seen trading well below its weighted averages subsequent to the auction, with the 182 day bill been traded at a low of 11.40% and the 364 day bill at 12.15%.

 Overnight call money and repo rates adjust to policy change

 Overnight call money and repo rates reflected a dip yesterday in line with the policy rate reduction to average 10.32% and 9.51% respectively. Liquidity remained at a net deficit of Rs. 1.2 b as the Central Bank refrained from conducting any OMO auctions for a fourth consecutive day.

 In forex markets yesterday, the USD/LKR rate gained marginally by 20 cents to close the day at Rs. 128.65 as forward premiums narrowed.  The total dollar/rupee volume for the previous day (10 December 2012) was US$ 45.08 million. Given are some forward dollar rates that prevailed in the market: one month – 129.60; three months – 131.70; and six months – 134.53.

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