Secondary Market Curve Steepens as Short End Softens and Long End Pushes Higher
Sri Lanka’s government securities market showed a diverging pattern this week, with short-term Treasury bill yields continuing to ease while longer-dated bond yields in the secondary market pushed higher, resulting in a visible steepening of the yield curve.
At the week’s Treasury bill auction, the Public Debt Management Office raised the full offered amount of LKR 140.0 billion. The 3-month and 6-month bills raised LKR 71.9 billion and LKR 50.0 billion respectively, while the 12-month bill raised LKR 18.1 billion, below its LKR 30.0 billion offer. Weighted average yields on the 3-month and 6-month bills declined by 9 basis points and 3 basis points respectively, settling at 9.86% and 10.21%, while the 12-month yield held steady at 10.20%.
The picture was different further along the curve. Comparing this week’s secondary market yields against the prior week, the below-91-day segment fell 25 basis points, consistent with the auction results. But several longer tenors moved in the opposite direction. The 4-year and 10-year points each rose 20 basis points week-on-week, while yields across the 7-year to 13-year range climbed between 15 and 20 basis points. The 2-year point was unchanged.
Trading activity in the secondary market itself was described as subdued, with moderate volumes from both banks and primary dealers. Among maturities that changed hands, the 15.10.2028 and 15.12.2028 bonds traded in a range of 10.75% to 10.77%, the 01.08.2030 maturity traded between 11.70% and 11.75%, and the 15.01.2033 maturity traded at 12.25%.
Foreign holdings of government securities rose to LKR 182,386 million, up 3.30% week-on-week, continuing a gradual upward trend visible over the past several weeks.
Overnight liquidity in the banking system contracted to LKR 165.96 billion from LKR 173.80 billion in the previous session. On the currency front, the rupee held flat at 336.25 against the US dollar.
Separately, a new Treasury bond auction was announced for 30 July, offering four maturities: the 11.60% 2031, 11.70% 2034, 10.85% 2036 and 10.75% 2037 bonds, with a combined offer of LKR 240.0 billion across the four tenors.
Key Numbers
| Metric | Value |
|---|---|
| 3M T-Bill weighted average yield | 9.86% (-9 bps) |
| 6M T-Bill weighted average yield | 10.21% (-3 bps) |
| 12M T-Bill weighted average yield | 10.20% (unchanged) |
| T-Bill auction total raised | LKR 140.0 billion (full offer) |
| Below-91-day secondary yield (WoW) | -25 bps |
| 4-year secondary yield (WoW) | +20 bps |
| 10-year secondary yield (WoW) | +20 bps |
| Foreign holding of government securities | LKR 182,386 million (+3.30% WoW) |
| Overnight liquidity | LKR 165.96 billion (from LKR 173.80 billion) |
| USD/LKR | 336.25 (flat) |
Business Impact
The divergence between falling short-term rates and rising long-term yields is a relevant signal for businesses managing debt and investment decisions. Companies relying on short-term working capital facilities or T-Bill-linked instruments may see marginal relief from softer short-end rates, while businesses or investors with exposure to longer-dated government securities should note the upward pressure on long-tenor yields, which can also influence corporate bond pricing and long-term borrowing costs. The steady rise in foreign holdings of government securities is a data point worth monitoring as one indicator of external investor confidence in Sri Lanka’s fixed income market, alongside the equity market’s ongoing foreign outflows.
Source Attribution
Source: Central Bank of Sri Lanka statistics and publicly available market information.