With the primary market auction more than two times oversubscribed, Treasury bill rates fell further. The six month Treasury bill yield fell to 6.95 percent from 7.02 the previous week while the 12 month Treasury bill yield fell to 7.10 percent from 7.14 percent a week ago.
These rates for tenures of six and 12 months are now much lower than the overnight repurchase rate, the policy rate for overnight bank deposits with the Central Bank, which is 7.25 percent.
The three month bill was not seen in the primary market for several weeks. "With rates this low, the government would obviously prefer to borrow on longer tenures," a dealer to The Island Financial Review.
The banking sector has been running on excessive rupee liquidity positions for the past few months; some dealers say to the tune of Rs. 30 billion on average per day.
Banks say there is little demand for credit, with too few viable project proposals coming in from the private sector. Most businesses on the other hand, especially the micro, small and medium enterprises say banks are too stringent and cautious in their lending.
Whatever the reasons, the slow growth of private sector growth is worrying the authorities and even the IMF commented that private sector credit growth was crucial for sustaining economic growth at the rate of 7 to 8 percent.
Last week the Central Bank issued the following directives to be implemented in the banking sector by the end of October: interest rates on housing loans should be brought down to 14 percent per annum, interest rates on credit card advances brought down to 24 percent per annum while interest rates on other loans and advances have to be adjusted downwards by 1to 2 percent per annum.
Dealers said the market was anticipating the government would reduce its outstanding domestic debt, as the Central Bank earlier said it would, thereby reducing the Treasury bills and bonds in circulation.
"The US$ 1 billion bond issue was subscribed at 6.5 percent and this is much lower than what the government is paying on Treasury bills and bonds. The ten year rupee denominated Treasury bond carries a yield of between 9 and 9.5 percent which is much higher than the ten year dollar bond," a dealer told The Island Financial Review.
Dealers said the government could retire some of the issued Treasury bills and bonds by buying them back. In fact the government said it would use some of the proceeds from the US$ 1 billion bond issue to retire short term foreign debts and high cost domestic debts.
"Liquidity of the banking system is high, and demand for credit is low. Businesses could be postponing their borrowings hoping that interest rates would come down further," a dealer said.
Some dealers were anticipating a policy rate cut last week, but the Central Bank left policy rates unchanged. "Despite this, Treasury bill rates have come down this week, an indication that market expectation is for rates to fall further," he said.
Another dealer said Sri Lankan banks were not leveraged, compared to American or European banks which were exposed to toxic assets which led to the global financial crisis.
"For this reason, Sri Lankan banks continue to survive on their ability to generate deposits, and the Central Bank knows this and this maybe why it did not want to cut policy rates further," he said.
source - www.island.lk
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