Questions have again been raised over the government securities (G-Secs) auction process as a recent treasury bond issue had accepted triple the amount it offered at a significantly higher interest rate, driving up the government’s cost of borrowing.
On March 29, 2016, the Central Bank offered a 14-year and one-month bond (2030 bond) to raise Rs.10 billion. But the bank accepted bids up to Rs.29 billion – almost thrice the amount offered – at a higher rate of 14.23 percent.
The Central Bank denies any irregularities in the process and said the spike in bond yields reflected the recent monetary policy actions and volatile global markets.
However, the bond yield significantly came down on the next day in the secondary market (see illustration), opening up an avenue for those who bought the bonds to make thumping profits by selling them.
According to economist Murtaza Jaffergee, at a time when the interest rates are going up, it is irrational to borrow for 14 years at an interest rate of 14.23 percent, when you can minimize your exposure by borrowing short term.
“If your interest rates are going up and you are vulnerable, and if you still need to borrow more money, you need to borrow short term. Then your exposure is only for the next three or four years. If so, at least you pay the penalty in the short term only, not for 14 years,” Jaffergee told a recent forum in Colombo organised by the National Chamber of Commerce.
However, Central Bank Deputy Governor P. Samarasiri defended the interest rate at which the 2030 bond was issued and said the interest rate could have even gone up to 20 percent levels had not for their debt raising strategies prevented such a spike in yields and the possible market panic.
According to Samarasiri, there was a “last minute” money requirement of Rs.105 billion by the government by April 1, 2016. He stressed that had they announced the entire quantum at a single auction, the rates could have even gone up to 20 percent, due to the announcement effect.
Two days later, on March 31, 2016, the Central Bank’s treasury bond auction raised Rs.40.1 billion, little more than twice the amount offered. During the two days, the government raised Rs.117.9 billion in total through bonds.
Sri Lanka’s G-Secs auctions practice the bad habit of accepting bids way higher the amount they offer, raising serious questions over the rationality and transparency of such issues.
For example, the bond auction on March 29 saw the Central Bank accepting bids worth Rs.77.8 billion in total under different maturities, double the offered amount of Rs.40 billion.
It was only last week the former parliamentary oversight committee on state enterprises – the Committee on Public Enterprises – Chairman D.E.W. Gunasekera demanded explanations from the government for raising bonds at very high rates while insisting on the Central Bank Governor to reveal the primary dealers who bought the bonds.
However, Samarasiri dismissed the allegations calling them baseless and said the rising interest rates in the bills and bond markets reflect the policy decisions taken in recent times to tighten the monetary policy.
Responding to calls for greater transparency in G-Secs auctions, Samarasiri said the Monetary Law Act bars releasing individual information to the public, hence it could not be done.
“This is not for Sri Lanka only, from all other Central Banks, the same question is asked: ‘why don’t you release individual information?’ As policymakers, we can’t do that,” Samarasiri told the media during a Central Bank press conference held last week.
Jafferjee, who is also Managing Director of JB Securities (Private) Limited, a Colombo-based stockbroking firm, said there was absolutely no price transparency in the G-Secs market although it was much bigger than the country’s stock market.
“In the stock market if anybody trades, everybody knows. There’s total price transparency. The G-Secs market is three to four times bigger than the stock market. But absolutely no price transparency,” he said.
However, Samarasiri during the press conference said, “These are not the things that you can do telling everybody. I don’t know what transparency people are talking about in these kinds of transactions.”
Nevertheless, G-Secs yields are used as proxy rates in an economy when pricing all types of assets and commodities such as lands, properties and equities. Hence, the sudden spikes and wide fluctuations in bond yields could have a ripple effect on every citizen of the country. “So, this (bond yields) is feeding into prices of every commodity. The price of money is continuously changing and there’s going to be a real effect on all of us because the banks will have to start pricing in for this uncertainty which will drive up the cost of borrowing.
Businesses will have to price in the cost of uncertainty in their pricing,” Jafferjee cautioned.
It was only over a year ago on February 27, 2015, a series of allegations were levelled against the Central Bank over a bond scam when it accepted 10 times the offer amount of Rs.1 billion for yields up to 12.5 percent – above the target borrowing rate of 9 to 9.5 percent— where most of the higher yield bids alleged to have been offered to a primary dealer owned by the son-in-law of the Governor of the Central Bank, causing much stir in the financial markets.