Central Bank does not expect firming up in T-Bill yields

• „Cites improved  government finances and  smaller auctions in rest of  year „
• Prime rate further falls by  13bps to 10.56%

The Central Bank said they expect the government securities yields to ease further from their current levels in line with the recent policy rate cut despite some uptick seen recently. Commenting on the bill and bond  yields, which saw some bottoming out  in March, Central Bank Governor Dr.  Nandalal Weerasinghe said it doesn’t  indicate a trend, instead it was a  reflection of heavy borrowings made  by the government during the month. Speaking at the recent postmonetary policy meeting press  conference, he said that last month  saw the largest bills and bonds being  issued on behalf of the government,  which caused the yield decline to  reverse somewhat.

However, he said that as the auction  calendar does not indicate any similar  large bill or bond auctions going  forward, there cannot be a pressure on  the yields to move up. He continued to refer to the  improved government finances and the  buffer owned by the Treasury, which  was possible from the exponential hike  in taxes brought in from the second  half of 2022, with the aim of seeking  the International Monetary Fund  bailout, to resuscitate the economy,  which fell into crisis from the foreign  exchange shortage. After the comments, while the first  bill auction saw the yields falling  across the three tenures, the subsequent  auction held last week saw some  upward movement in yields. For instance, the yields at the first  bill auction held soon after the policy  rate cut fell by between 10 and 16  basis points, while at the next auction  held last week, three and six-month  bills gained four and seven basis  points each. However, nobody considered it  to be a beginning of a continued  increase in the yields. This may be perhaps also due to  the higher amount offered at the  auction, where the Central Bank  offered Rs.135.0 billion, up sharply  from the Rs.80.0 billion offered at  the auction two weeks ago. Meanwhile, in line with the  expectations of the officials, the  prime rate continued to fall and last  week too, the benchmark rate fell by  13 basis points to 10.56 percent. The prime rate is a leading  indicator of the rates for small  business loans, mortgages and  consumer loans. The continuous fall in the prime  rate could accelerate the growth  in loans to the real economy by  the banks.