Overseas investor appetite for rupee-denominated government debt continues a steady multi-week climb, even as bond yields rise and the currency weakens
Foreign holdings of Sri Lanka’s local currency government securities rose 3.98% week-on-week, extending a steady upward trend that has now persisted for several consecutive weeks. The increase comes even as government bond yields moved higher across most tenors during the same period, suggesting foreign investors have continued adding exposure despite a less favourable pricing environment for existing holders.
A Sustained Climb
The rise in foreign holdings is not an isolated weekly move but part of a broader trend visible over the past two months. Holdings have climbed steadily from approximately LKR 176.6Bn in mid-July to LKR 210.6Bn by early September, an increase of roughly 19% over that period. The climb has been consistent week-on-week, with only modest variation in the pace of accumulation.
This steady build-up stands in contrast to the equity market, where cumulative year-to-date foreign flows remain deeply negative despite occasional single-day inflows. The divergence suggests foreign investors may currently be expressing more confidence in Sri Lankan fixed income exposure than in local equities, though the two markets are driven by different investor bases and considerations.
Context From the Broader Market
The rise in foreign holdings came during a session in which secondary market bond yields moved higher, with mid-tenor bonds rising by approximately 25 basis points and short and long-tenor bonds rising by around 10 basis points. On the currency front, the rupee depreciated marginally against the US dollar, trading at LKR 328.59 compared to LKR 328.05 in the prior session. Banking system liquidity also contracted slightly, to LKR 330.09Bn from LKR 337.05Bn.
Total outstanding government securities stock stood at LKR 18,661Mn, comprising LKR 16,278Mn in T-bonds and LKR 2,383Mn in T-bills, with total outstanding stock up a modest 0.16% week-on-week.
Business Impact
Sustained foreign inflows into government securities are generally read as a signal of external confidence in Sri Lanka’s fiscal and monetary trajectory, and can support demand at future government debt auctions. For businesses and treasury managers, continued foreign participation in the bond market may help moderate upward pressure on yields over time, even as near-term movements reflect local selling activity. The trend is also relevant to policymakers monitoring external financing conditions, though a single trend line should not be read in isolation from broader currency and liquidity dynamics, both of which showed modest deterioration in the same period.
What to Watch Next
Market participants will be watching whether the rise in foreign holdings continues in coming weeks, particularly against a backdrop of rising mid-tenor yields, and whether increased foreign participation eventually feeds through to auction results or broader currency stability.
Key Numbers
| Metric | Value |
|---|---|
| Foreign Holdings of GSec (WoW change) | +3.98% |
| Foreign Holdings (Mid-July) | ~LKR 176.6Bn |
| Foreign Holdings (Early September) | ~LKR 210.6Bn |
| Approx. Increase Since Mid-July | ~19% |
| Total Outstanding GSec Stock | LKR 18,661Mn |
| — of which T-Bonds | LKR 16,278Mn |
| — of which T-Bills | LKR 2,383Mn |
| Total Outstanding Stock (WoW) | +0.16% |
| USD/LKR | 328.59 (from 328.05) |
| Banking System Liquidity | LKR 330.09Bn (from LKR 337.05Bn) |
Source Attribution
Source: Central Bank of Sri Lanka statistics and publicly available market information.