Secondary market trading in government securities has tapered off to a fraction of last years levels with political uncertainty putting bond dealers on the defensive.
Trading in long bonds has ceased while securities in the five-year range are seeing thin trading according to primary dealers.
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rnPolitical uncertainty and the expectation of a spike in rates have driven primary dealers and other players in the bond market to lie low to minimize losses.rn
rnInterest rates have gone up close to one percent since the President took over three crucial ministries from the UNF government.rn
rnThe Central Bank has also stayed away from long bond auctions due to the lack of demand for those securities and to prevent rates from being pushed up.rn
rnDealers were quoting two ways for even the 10-year bond before the Presidents rash move to try and topple the government, according to a primary dealer.rn
rnTrading still happens on the short end of the yield curve.rn
rnAnalysts say the Central Bank would find it tough to contain interest rates at the current level over the coming months in line with the banks stated policy of low and stable interest rates.rn
rnMarket players do limited trading on bonds within specified exposure limits.rn
rnEven State managed insurance funds who have the luxury of holding long bonds to maturity are keen to sell despite the absence of willing buyers in the market.rn
rnAnalysts say most primary dealers could have their capital wiped out if rates go up by as much as a further two percent.rn
rnObservers however say that small banks and small operations that were looking towards bonds to make a quick buck could be heavily exposed to even a small rise in interest rates.rn
rnA further half-a-percent spike in interest rates could have serious consequences on those exposed to long bonds.rn
rnCentral Bank wants primary dealers to double their capital, which is being viewed negatively by market players.rn
rnThey say the proposal sounded good before the uncertainty hit sending the market into a spin.rn
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-LBR Newsdesk: LBOEmail@vanguardlanka.comrn