Article’s purpose
This short article is to alert a possibility of Treasury bill market irregularities that can cost to the government and its debt sustainability. This is revealed from the unusual pattern of acceptance of bids at the last Treasury bill auction held on 26 March and recent auction trends.
Auction results
Yields rates were kept unchanged at the previous week’s levels by accepting significantly below the funding requirement, especially for 91D bills.
Selected early warnings and concerns over the auction results
- Acceptance of a negligible amount of 91D bills (Rs. 4,809 mn) way blow the announced amount (Rs. 20,000 mn) and bids (Rs. 21,383 mn) which is a deviation to the recent trend. The trend of lower acceptance of 91D bills was observed from several auctions prior to this although the normal tendency has been to accept bids of 91D much more than the amount announced for the auction.
- Acceptance of sizable amounts from other two longer maturities while this tendency has prevailed for several auctions prior to this auction against the normal pattern.
- Total acceptance from all three maturities was well below the funding requirement (i.e., accepted Rs. 73,380 mn against the requirement of Rs. 100,500). There has been only 13 such instances in 2024 and this is the first instance so far in 2025.
- It is surprising that even the post-auction, e-mail-based placement system offered at the auction weighted average yields subscribed only a negligible amount of Rs. 519 mn as compared to the funding deficit of Rs. 27,120 mn. Therefore, the placement system which is an instrument created to neutralize market pressures and undue speculations also has failed in this instance.
Auction governance concerns
- This auction seems to be non-compatible with the last monetary policy statement released on same day because keeping Treasury bill yields unchanged by under-funding the government is inconsistent with the money market conditions with excess liquidity and falling interest rates that were stated in the monetary policy statement.
- Why the Central Bank accepted more bids from longer maturities when interest rates are expected to decline in contrast to the best practice of accepting more from shorter maturities in such market conditions is questionable. The best practice is to economize the interest cost to the borrower. Instead, the concerned acceptance has become favourabel to dealers’ or lenders’ profitability and their portfolio management.
- The sudden change in the bidding behaviour reflects market expectations of higher interest rates in the near-term. This may be the reason for the reluctance of the Central Bank to cut policy interest rates despite the persistent deflationary trap confronted by the economy on year-on-basis from August 2024 and monthly basis from January 2024 where the Central Bank forecasts this to continue in the near-term.
- If interest rates prevail to stay or rise as such, given the present deflationary trend, the question arises as to who is to benefit. This may especially help hot capital investors affected by the forced appreciation of the Rupee, given global interest rates are in falling trend in line with reduced inflation.
- The space for this type of questionable yield rate decisions is available because the Central Bank does not have an announced policy for auctioning Treasury bills. If the Central Bank is free to announce and accept any amounts of the three maturities on auctions, the question arises as to what is the purpose of announcing different amounts for the three maturities in the total funding requirement. It would be more transparent to announce auctions soliciting bids for the total funding requirement and to accept bids for different maturities depending on respective demand conditions and debt profile.
- Therefore, it is a clear insider information if the Central Bank accepts lower or higher amounts inconsistent with the total funding requirement. This has helped the Central Bank to use auctions of government securities as the de factor monetary instrument to drive its interest rate policy, given the activisms of the government securities market, as the policy interest rates are virtually dormant or hypothetical instruments. The public issue here is the additional interest cost involved in under-funding to keep market interest rates at levels as the Central Bank wishes outside the debt market forces. Therefore, government debt market has lost the flexibility to respond to own demand and supply conditions, other than the Central Bank’s monetary preferences. In that context, the government will never have an independent fiscal policy.
Graphical evidence
Acceptance of bids
- Auctions have been driven by 91D maturity but its significance has been reduced in last three auctions by giving the prominence to other two maturities.
Yields and monetary policy
- Treasury bill yields are unofficially driven for the monetary policy as revealed from the Central Bank’s Standing Lending Facility Rate (SLFR).
- In last three months, policy interest rates have been kept artificially high despite the chronic deflationary plight observed from the beginning of 2024 while pushing yield rates arbitrarily below policy interest rates to signal the market of lower interest rate policy. Therefore, Central Bank’s claim that policy interest rates at present levels are appropriate has no basis.
- Rising yield rates of longer maturities and the tendency of keeping policy rates higher are clearly observable from money market interest rates. Therefore, risks to public debt sustainability are hidden in numbers despite artificial stories of international credit ratings, debt restructuring and IMF debt sustainability analysis.
Concluding concerns
- In view of the total volume and turnover of Treasury bills accepted from auctions since August 2021 amounting to Rs. 22.3 trillion, the impact of market manipulation of auction yield rates for non-funding/non-fiscal objectives would be significant on interest cost to the government. This is alarming as the total interest cost in the budget 2025 is expected to be 59.1% of the estimated government revenue.
- Under the new Public Debt Management Act, Government’s Public Debt Management Office and Minister of Finance are responsible for issuance and management of public debt. Therefore, the Central Bank dealing with auctions of government securities within the monetary policy requirements is clearly in conflict of the budgetary and debt management policy of the government.
- The danger of the debt management by the Central Bank during the past 72 years from 1950 is evident from the eventual default of debt by the Central Bank itself in 2022. Therefore, the new Public Debt Management Act should be an attempt to prevent such defaults in future by managing debt in safe, sound and sustainable manner within the interests of the budgetary requirements and fundamentals in the public/tax payer interest.
- Non-transparency of government securities market in the absence of a modern electronic trading platform is a continuous blow to sound debt management and market development.
- As the government is not interested in any change of prevailing systems, given risks to its sustainability, tax payers cannot expect any benefits from debt management stated above in the foreseeable future. Therefore, debt mismanagement and abuse will continue for long-term in future.
(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures. All are personal views of the author based on his research in the subject of Economics which have no intension to personally or maliciously discredit characters of any individuals.)
P Samarasiri
Former Deputy Governor, Central Bank of Sri Lanka
(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 13 Economics and Banking Books and a large number of articles published.)
Source: Economy Forward
*The content in this article is of personal views of the author and does not reflect the opinion of LNW in any way.
