Did vested interests bring down yields? - Theories abound regarding Wednesday's T-Bill auction

From Ceylon Today - By Paneetha Ameresekere

Theories abound in relation to Wednesday's (18 March) Treasury (T) Bill primary auction, where yields unexpectedly fell sharply, when the market in fact was expecting yields to continue to climb.

Wednesday's T Bill primary auction saw the weighted average yields (WAYs) of 91 and 182 day (three months and six months) maturities fall sharply by 31 and 44 basis points (bps) each to 6.79% and 6.87% respectively and that of the 364 day (one year) maturity by 38 bps to 6.99%.(See also yesterday's Ceylon FT).

The fall in those WAYs at Wednesday's auction has to be looked at in the context that since the advent of the Maithripala Sirisena-Ranil Wickremesinghe coalition government at the 8 January, 2015 poll, T Bill yields have been continuously on the upward ascent.

For instance up to the time of Wednesday's auction, in the nine weekly auctions that followed in the interim (ie after the 8 January poll),the WAYs of three and six months maturities and that of one year maturities had had increased by 136, 147 and 136 bps each to 7.10%, 7.31% and 7.37% respectively.

The market had taken this as a signal that rates would continue to be on an upward ascent, sources told Ceylon FT.

In fact at Tuesday's (17 March) T Bond primary auction, the WAY fetched for the 2021 maturity increased by 38 bps to 9.55%, compared to the .WAY fetched for a 2022 maturity at a similar auction held a week earlier, ie on 10 March, which fetched a WAY of 9.17%, they said. (See also Ceylon FT of 11 March).

In reality, when maturity tenures increase, yields in tandem too increase and do not decrease, they said. "But here we saw the contrary take place, where in fact the WAY of the 2022 maturity was less than that fetched by the 2021 maturity, whereas the latter was the latest of such T-Bond auctions held to date, the sources said.

So, the indication conveyed to the market, vis-à-vis Wednesday's T-Bill auction, ie from an auction held only the day after Tuesday's T-Bond auction for the 2021 maturity, coupled with immediately preceding events was that the upward ascent of T-Bill yields would continue, but the contrary took place at Wednesday's auction, they said.

Under the circumstances one wonders whether that was an act of sabotage to discredit the Sirisena-Wickremesinghe government, they asked.

After an alleged T-Bond scandal in connection with a T-Bond primary auction held on 27 February, 2015, where Wickremesinghe's appointee Central Bank of Sri Lanka's Governor Arjuna Mahendran's name has been dragged into, Wickremesinghe has launched an investigation into this, while saying that alleged T-Bond and stock market scandals perpetrated under the previous regime too would be scrutinized.

Some of the names figured in Wickremesinghe's accusation, were those associated with Sri Lanka's financial markets. They had also been allegedly close to the previous regime. But no attempt to punish those miscreants were made by the powers that be, then.

Therefore, sources wonder whether Wednesday's surprise yields contraction at that day's T-Bill primary auction was due to the machinations of such individuals, so as to discredit the new regime.

They further said that in tandem with the sharp declines in T-Bills WAYs at Wednesday's primary auction, the tenures of similar short-term maturities in secondary market trading too nosedived. "However, those of longer maturities didn't suffer similar steep falls at Wednesday's trading," they said.