GoSL Suppresses Borrowing Costs

When banks are offering interest rates of between 14-15% on three months deposits, it beats the living daylights how the weighted average yield (WAY) of the 91 day (three months) Treasury (T) Bill crawled up by a mere seven basis points (bps) to 10.74% at Wednesday’s T Bill auction, a market source told this newspaper.
Issuing/reissuing of T Bills to the market is one way that the Government of Sri Lanka (GoSL) raises money from the same to fund its expenditure needs. Higher the yields (WAYs) commanded at such auctions, higher is the interest component cost that GoSL has to pay investors against such borrowings.
Generally, GoSL in order to keep such costs low, and as a signal to the market that they want borrowing costs to come down (T Bill yields are also referred to as the benchmark T Bill yields, ie on the assumption that market interest rates follow the movement of such yields) use captive funds such as the EPF to keep the yields of such investments low.
T Bonds and T Bills are also known as risk free investments, in the sense that there is a guarantee that even if there are liquidity issues facing  GoSL in honouring investors when such investments mature, they will even print money and payoff such investors of their legitimate claims, as a last resort.
This however is not so when the EPF invests in the stock market. If the value of a stock goes lower than EPF’s capital investments, ipso facto its value too declines.
There is no way that the EPF can recover such a loss, in the event such stocks are disposed of at a price lower than their initial investment made by EPF, or at the point of valuation, when the market price of such stocks are lower than their initial investment value.
The court case revolving round the EPF is in regard to such investments (see also connected story page 33).
Nevertheless at the previous week’s T Bill auction, the WAY of the 91 day T Bill in fact fell by one bp to 10.67% (see also The Sunday Leader’s last week’s business pages).
Meanwhile the WAYs of the other two T Bill tenures on offer, namely the 182 and 364 day (three months and one year), increased by 12 and four bps to 12.07% and 12.81% respectively at Wednesday’s T Bill auction.

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