Amid mounting allegations of possible rigging of the country’s bond market, the Central Bank Governor at a recent press briefing defended his staff and said the large fluctuations in the bond yield was a reflection of the extremely volatile and maligned global market conditions.
Shortly after the Central Bank raised Rs.29 billion which almost tripled the amount it offered at the bond auction held on March 29, 2016 at an extremely higher rate of 14.23 percent for 14 years (2030 bond), questions were raised by market participants and economists of the efficiency and the credibility of the government securities auction process.
This was not only because the Central Bank raised many times the amount it announced as it had been the practice, but also the secondary market yield of the same bond came down to 12.83 percent in just 4 days, giving a windfall capital gains for the primary dealers who sold the bond. Analysts opine that there is a negative co-relation between interest rates and the price of the bond.“Fluctuation is endemic to these markets in the period of volatility when the Federal Reserve Bank is expected to increase interest rates further and there is a lot going on in the world. Bank of Japan and European Union are offering negative interest rates. We are living in a very uncertain environment and that is reflected in the local market,” Governor Arjuna Mahendran told a recent media briefing.
Further, he defended his staff, particularly at the Public Debt Department and said they were carrying out an exceptional job amid trying circumstances. “So, to blame the staff of the Central Bank for that volatility is very unfair. I am not trying to getting into mechanics of this. I have taken the hands off policy and left it entirely to the professional staff and by the way I commend these gentlemen as they have done a sterling job in my view.“I have invested in several markets around the world and I think they are adopting the best standards possible here.
There is no question at all about their integrity. But please remember that these volatilities are reflective of a global environment which is extremely maligned for emerging markets instruments, the bonds in particular,” he added. However, the analysts demand reasons as to why the Central Bank raised moneys at such high rates for the longer term when it could raise at a lesser cost through short term bonds and roll them over. This could also be not in line with the government’s claims that the budget deficit would be narrowed to below 3 percent by 2020. This is the second such instance where the Central Bank came under spotlight for bond auction rigging charges as in the earlier instance on February 27, 2015 the Central Bank accepted Rs.10 billion worth bonds over and above the indicative rate, most of them were alleged to have been bought by a primary dealer related to the Governor of the Central Bank, causing much stir in the financial markets.
Asked if the same primary dealer was connected to this bond too, the Central Bank Deputy Governor, P Samarasiri said they are more concerned about the rates at which the bids are made than the persons or institutions. “That institution is also a primary dealer in the market. They bid not just in this particular auction but in every auction throughout the past. If they bid at an acceptable rate, we accept irrespective of the persons (or institutions),” Samarasiri said.
Denying the charges that the bonds were raised at higher rates, Samarasiri said the rate was reflective of the recent monetary policy tightening measures and available liquidity levels in the market. “We all like if we can borrow money for the government at 5 or 6 percent. You can’t do that. The Central Bank decides the quantum of money to be raised at the auction based on the government’s weekly fund requirement at a particular interest rate. Interest rates change at every auction based on the available liquidity in the market and I do not know how anyone could argue that this rate is high,” he added.