Letter: T-bond allegations: “They do not know what they are doing”
View(s):Many people have spoken on Treasury bond issues and it has even spread to village level where it is speculated to be a big scam in Sri Lanka.
However those who say so are unaware how the bond market works, why they are issued and how the dealers make profits or losses buying or selling bonds. Bonds are considered gilt-edged security with a ready secondary market to buy and sell bonds at all times.
The Central Bank [CB] sells bonds acting on behalf of the Treasury to raise money to meet government expenditure. Under normal circumstances issues are advertised in advance giving the total amount, the maturity date, closing time and date, etc. Maturity varies from two years minimum to 30 years maximum and interest is paid half yearly. The CB during the past (under the former regime) has been issuing bonds without advertising by calling buyers and making private deals at agreed rates. It is difficult to defraud or play out the CB as in the case of issuing bonds. We lend money to the government through the CB and it is only the CB that can play us out by not paying back the investment on maturity. The CB has the authority and discretion to cancel issues, take up more or less the amount advertised as we have witnessed during the past few years.
In terms of last year’s controversial issue of Rs. 1 billion and (thereafter) issuing Rs. 10 billion, it is mere exaggeration to say that somebody played out Rs.10 billion whereas the fact remains that the CB borrowed Rs.10 billion from the market. The malpractice that could have occurred in this case is that a particular dealer was given favourable treatment as the market was not aware that 10 times the advertised would be taken up. Malpractices could also occur when rates are manipulated and confidential information is leaked out before they are made public. Primary dealers take huge risks when investing in bonds as interest rate fluctuations could depreciate or enhance the value of their investments. For instance the value of bonds rise in a declining rate scenario and go down when interest rates rise. Primary dealers are a part and parcel of the market. They act as a conduit between the CB and the real investors.
A.G. Weerasinghe
Colombo