Rates rise for 5th week

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By 2017-01-11

By Paneetha Ameresekere

The money market, scarred by a lack of inflows, saw the weighted average yields (WAYs) of Treasury (T) Bills rise for the fifth consecutive week at yesterday's auction.
As a result, the WAY of the benchmark one year (364-day) T Bill rose sharply by nine basis points (bps) to 10.31%, that of the six-month maturity also by nine bps to 9.89%, while the short-term three-month (91-day) tenure, increased even more steeply by 19 bps to 8.97%.

Central Bank of Sri Lanka (CBSL) which administers such public debt, allowed the Government of Sri Lanka (GoSL) to borrow Rs 23,851 million by issuing/selling T Bills to the market, marginally less than the original borrowing figure of Rs 24,000 million that had been earmarked for such borrowings, yesterday.

Whatever excess liquidity that there is in the money market currently is those supplied by CBSL's purchase of T Bills (money printing) which may give rise to demand side inflationary pressure enveloping the economy.
Ideally, inflows should boost the money market's excess liquidity in the form of debt free enhanced foreign investments, exports and remittances.

Rs 6.7B printed money
In related developments, CBSL printed money to the tune of Rs 6,692 million to meet GoSL's funding needs, yesterday, data showed. As a result, GoSL's interest cost as shown by CBSL's face value (FV) T Bill holdings minus CBSL's book value (BV) T Bill holdings, increased by a thumping 68.26% (Rs 3,943.87 million) to Rs 9,721.47 million, yesterday over Monday, data showed.

Nevertheless, the market enjoyed net foreign inflows or an uplift in net excess liquidity to the tune of Rs 4,884 million (US$ 32.56 million) at yesterday's trading, data further showed. As CBSL deals in 'spot', conversions are based on the current, administered spot rate which is Rs 150 to the US dollar.

Due to these developments, money printing as of yesterday, increased by 18.75% to Rs 363,610.65 million compared to Monday's money printing figure and, excess liquidity increased by 7.31% to Rs 71,681 million at the end of yesterday's trading.
However, CBSL's FV T Bill holdings without taking into consideration standing lending facility rate value (SLFRV) and repos stood unchanged, yesterday over Monday, at Rs 306,963.65 million.

CBSL's FV T Bill holdings as of the previous day Monday (9 January) was also Rs 306,963.65 million. CBSL's FV T Bill holdings are defined as CBSL's book value (BV) T Bill holdings plus the GoSL's interest cost because of such. CBSL BV T Bill holdings as of Monday were Rs 301,186.05 million and the interest cost to GoSL because of such Rs 5,777.6 million.
In related developments, the money market's net excess liquidity as of Monday was Rs 66,797 million. Excess liquidity is defined as the difference between the standing deposit facility rate value (SDFRV) minus SLFRV plus repos.
Meanwhile, money printing is defined as CBSL's FV T Bill holdings minus SLFRV plus repos.

Rupee strengthens
In other developments, the rupee strengthened on the back of inflows, with both one week's and two week's forwards, the popular instruments of trading in the foreign exchange (FX) market these days due to CBSL's moral suasion, each strengthening by 10 cents to close yesterday at Rs 150.25/35 and Rs 150.45/55 to the US dollar respectively, in two way quotes interbank trading.

The 'spot' and the 'spot next' were not seen in the market, they said. However, 'normal' markets devoid of exchange controls, deal in 'spot,' where such dealings are settled after two market days from the date of transaction, whereas in the case of 'spot next' it's three.

Due to such controls, the market deals in one week's and two weeks forwards, for price discovery of the exchange rate.
Down the Gadaren slope
Meanwhile, the stock market after making pyrrhic gains in the last two market days to Monday fell at yesterday's trading on a nominal Rs 344.91 million turnover and 20.8 million share volume (SV).
As a result, the benchmark ASPI declined by 0.05% to 6,152.59 points and the more sensitive S&P SL 20 Index by 0.26% to 3,462.31 points.

Chevron Lubricants, the market's twelfth largest capitalized stock contributed to 59.05% (Rs 203.68 million) of yesterday's total turnover on a 1.31 million SV. Meanwhile, four stocks contributed to 63.31% of yesterday's total SV.
Those were junk stocks Adam Capital and Adam Investments, 7.97 million and 1.88 million respectively, second tier stock SMB Leasing (2.01 million) and blue chip Chevron (1.31 million). Adam Capital's total contribution to the day's turnover was a miserly Rs 11.16 million, Adam Investments Rs 3.75 million and SMB Leasing Rs 1.21 million.
Adam Capital's shares closed, up 7.69% to Rs 1.40 a share, Adam Investments', up 5.26% to Rs two a share, Chevron's, down 1.08% to Rs 156.30 a share and SMB Leasing's, flat at 60 cents a share.

Number of gainers was 54 and losers, 52. Nonetheless, the 'collapses' in share values of stocks such as JKH, the market's largest capitalized stock, Com Bank (its third largest), HNB (seventh largest) and DFCC Bank (sixteenth largest), brought the market down, yesterday.

As the movement of market indices is intrinsically linked to market capitalization (MC), when the share values (SVas) of indices such as Chevron, JKH, Com Bank, HNB and DFCC fall, then, not only do their individual MCs also decline, but also the market's overall capitalization as well.

For instance, JKH's SVa fell by 0.64% to Rs 140.50 a share, that of Com Bank by 1.34% to Rs 140 a share, HNB's by 1.11% to Rs 222.50 a share and DFCC's, down 1.90% to Rs 118.70 a share. Chevron saw its Sva decline by 1.08% to Rs 156.30 a share at the end of the day's trading yesterday.

Twin evils
The local markets are bogged down by the twin evils of rising rates due to a lack of inflows and foreign exits to US based assets because of the uplift in interest rates in the world's largest economy.
In the backdrop of the global financial crisis in 2007, the Federal Reserve System kept its benchmark policy rate, the Fed funds rate (FFR) virtually at zero levels to boost the economy, before raising it eight years later, by 25 bps to be between 25- 50bps in December 2015 due to the recovery of the US economy, and, after another 12 month hiatus, again by another 25 bps last month, for the FFR to be currently at between 50-75 bps.

The possibility of rising interest rates in the USA has been given a further fillip due to President elect Donald Trump's campaign pledges. Those include protectionism, infrastructure spending, tax waivers and deregulation, all of which will give a boost to uplift inflation if implemented. As a result, the Fed is expected to hike the FFR at least thrice this year.

Further, these developments have also resulted in foreign funds exiting from markets such as Sri Lanka and re-parking in US based assets for 'better' returns. These developments have resulted in bringing down the stock market, while at the same time causing downward pressure on the rupee. Also, rising interest rates in the local market have induced local investors to exit from the bourse and re-park assets in the fixed income market for better returns, thereby delivering a double blow to the local stock market.

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