Fears of Domestic Debt Restructuring Cause Treasuries’ WAYs to Rise

With the possibility of Sri Lanka’s domestic debt being restructured, the status of which the Government of Sri Lanka (GoSL) will inform the public next month (May 2023), there is a fear among investors to invest in Treasury (T) Bills and T Bonds (Treasuries), resulting in their weighted average yields (WAYs) rising, to entice investments in the same.

This fear is further reflected by the fact that banks’ Average Prime Lending Rates (AWPLRs)in lending to blue chip companies have been smaller than the WAYs fetched by the benchmark 364 day (one year) maturity T Bill at the weekly T Bill primary auctions for a record consecutive 21 weeks to Friday (21 April), latest Central Bank of Sri Lanka (CBSL) data showed.

This phenomenon first took place in the week ended Friday 2 December 2022, where banks’ AWPLR according to CBSL statistics was 27.89 per cent and the WAY of the one year T Bill was 29.46 per cent, showing that the difference between the WAY of the one year T Bill over that of the AWPLR was more by 1.57 percentage points (157 basis points (bps)).

Meanwhile, in the week ended Friday 21 April, banks’ AWPLR was 21.45 per cent and the WAY of the one year T Bill was 22.96 per cent, resulting in the latter being greater by 51 bps over the former.

Issuing of T Bills and T Bonds is a popular way that the GoSL raises money from the domestic market to meet its monetary needs. Investments in T Bills and T Bonds are generally considered riskless, because in the event GoSL is unable to repay such debt, CBSL, which has the sole mandate to print money, is normally directed to print demand-pull inflationary money and repay such creditors.

Another phenomenon that has taken place during this period and beyond is that the WAY of the longer tenure 364 T Bill maturity at the primary auction has been smaller than both the shorter tenure 91 and 182 day maturities for the thirty fourth consecutive market week to Wednesday 19 April 2023 and that of only the 91 day maturity being greater (vis-à-vis the 364 day maturity) for the thirty fourth consecutive market week to 19 April 2023. Those are indications that the market expects yield pressure to last only in the ‘short’ term.