Yield curve edges higher across most tenors as investors shift decisively toward selling, with mid-dated bonds bearing the brunt of the move
Yields on Sri Lanka’s government bonds moved higher across the curve, as investors turned more decisively toward selling after a mixed session the previous day. Mid-tenor bonds absorbed the brunt of the move, with yields in that segment rising by approximately 25 basis points, while short and long-tenor instruments saw a comparatively modest increase of around 10 basis points.
Trading volumes were moderate through the session, with activity spread across several benchmark maturities as the curve adjusted upward.
Where the Curve Moved
Within the 2030 segment, the 01.08.2030 and 15.10.2030 maturities traded in a wide band between 10.60% and 10.75%. Selling pressure drove the initial moves, though buying interest emerged later in the session, allowing both bonds to settle near 10.70%.
Further out on the curve, the 15.01.2033 maturity traded between 11.15% and 11.20%. At the belly of the curve, the 15.10.2034 and 15.03.2035 bonds both changed hands at 11.70%, reflecting the broader mid-tenor pressure seen across the session.
Longer-dated paper also moved higher: the 15.08.2036 maturity traded at 11.85%, while the 01.07.2037 bond was seen trading at 11.95%, the highest level recorded across the session.
Week-on-week, the shift was broad-based. Tenors from the 4-year through 9-year points each rose between 10 and 20 basis points compared to the prior week, with the 8-year point showing one of the sharpest moves at 20 basis points higher.
Auction and Liquidity Context
The move in secondary market yields came even as a T-bill auction settling September 4 saw rates decline across all three tenors: the 91-day rate fell 10 basis points to 8.96%, the 184-day rate fell 17 basis points to 9.27%, and the 364-day rate fell 8 basis points to 9.81%. The divergence between falling short-term bill yields and rising bond yields points to a curve that is steepening, with investors demanding more compensation for holding longer-dated risk.
Banking system liquidity contracted marginally to LKR 330.09Bn from LKR 337.05Bn in the prior session. Foreign holdings of local government securities, meanwhile, continued a steady climb, rising 3.98% week-on-week and extending a multi-week uptrend that has taken holdings from roughly LKR 176.5Bn in mid-July to LKR 210.6Bn by early September.
On the currency front, the rupee depreciated slightly against the US dollar, trading at LKR 328.59 compared to LKR 328.05 in the previous session.
Business Impact
A steepening yield curve, with short-term rates falling while mid-to-long tenors rise, has direct implications for corporate borrowing costs and government debt servicing. Businesses planning fixed income investments or benchmarking loan pricing against government securities should note that longer-dated borrowing costs are trending higher even as short-term rates ease. The sustained rise in foreign holdings of government debt is a positive signal for external confidence in rupee-denominated assets, though it should be read alongside the broader liquidity contraction in the banking system.
What to Watch Next
Market participants will be watching whether the mid-tenor yield rise continues into subsequent sessions, and whether the divergence between short-term bill yields and longer bond yields persists or narrows. The upcoming T-bond auction results and continued trends in foreign holdings of government securities will also be closely tracked.
Key Numbers
| Metric | Value |
|---|---|
| Mid-Tenor Yield Move | +25 bps (approx.) |
| Short/Long-Tenor Yield Move | +10 bps (approx.) |
| 01.08.2030 / 15.10.2030 | Traded 10.60%–10.75%, settled ~10.70% |
| 15.01.2033 | Traded 11.15%–11.20% |
| 15.10.2034 / 15.03.2035 | Both traded at 11.70% |
| 15.08.2036 | Traded at 11.85% |
| 01.07.2037 | Traded at 11.95% |
| 8-Year Tenor (WoW) | +20 bps |
| Banking System Liquidity | LKR 330.09Bn (down from LKR 337.05Bn) |
| Foreign Holdings of GSec | +3.98% WoW |
| USD/LKR | 328.59 (from 328.05) |
Source Attribution
Source: Colombo Stock Exchange market data, Central Bank of Sri Lanka statistics and publicly available market information.