First Capital Research (FCR) this week asked those who have put their money into long-term bonds to ‘hold’ them until the picture becomes clearer on how the future yields would behave, a change from their earlier recommendation to ‘sell’, in January.
However, the research arm of the fund management firm continued to hold its view on the short-term bills and medium-term bonds from January, i.e. to ‘sell’ them, with the expectation of yields to rise in future.
Bond yields and prices are inversely related. When the yields rise, the investor incurs a loss by selling the bond at lower price and vice versa.
FCR holds the view that the market interest rates to reverse course from their lowering trend, starting from the second half of the year with possible policy rate increases during the third and fourth quarters.
The research agency changed its recommendation on the long-term bonds after two bond auctions and five bill auctions went undersubscribed, pushing the yields higher. But the Monetary Board maintains a ‘lower for longer’ view.
“The last two bond auctions and five bill auctions were undersubscribed by a considerable amount, as it pushed yields to five-month high on the back of lack of clarity among market participants with the current economic condition,” FCR said in its revised outlook on the fixed income securities this week.
On February 24, at the latest of the two bond auctions held, the Central Bank issued bonds maturing in November 2023, September 2024, January 2026 and July 2028, to raise Rs.125 billion.
However, the Central Bank accepted only bids worth of Rs.90.95 billion, with only January 2026 bond being fully accepted, despite bids being received for much higher than what was offered under all four tenors. However, ICRA Lanka Limited, a rating agency, recently said the partial acceptance of the bills and bonds was intentional and appeared to have been drawn from the key tenets of the Modern Monetary Theory, what is said to be followed by the authorities to manage the economy.
The Monetary Board is widely expected to keep the rates steady today (Thursday) when they meet for the second time for the year to determine the trajectory of the rates.
The Monetary Board does not take decisions looking at the bond markets and such decisions primarily depend on the inflation trajectory, as the rates shouldn’t be set too high to derail the economy nor should be set too low to overheat the economy.
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