Bond market rallies on final US Reciprocal Tariff outcome

THE Secondary Government securities market last week, initially kicked off on a subdued note, with activity and volumes remaining muted up to midweek. Yields were seen edging higher at the start of the week amidst a cautious sentiment, as market participants stayed largely on the sidelines ahead of the back-to-back Treasury Bond and Bill auctions and the anticipated 1 August deadline for the US Reciprocal Tariff decision. Tuesday’s Rs. 122 billion bond auction outcome left overall market dynamics broadly unchanged, with trading remaining confined to a few selected maturities. A slight pickup in activity was observed on Wednesday following the announcement of the T-Bill auction results, which saw a marginal downward movement in yields.

- BY WEALTH TRUST SECURITIES

A shift in market tone was observed from Thursday onwards, as yields were observed edging downwards with large volumes transacted ahead of the anticipated announcement due for 1 August (Friday) regarding the ‘final’ outcome of the US Reciprocal Tariffs. A bulk of Thursday’s activity was centred on 2031 and beyond tenors. Friday was the highlight of the week, as the market witnessed a notable turnaround following the official announcement that the US had reduced Reciprocal Tariffs for Sri Lanka to 20%, triggering a rally in the Secondary bond market. This announcement triggered a decisive change in sentiment. Demand and transaction volumes surged in response, driving yields lower across maturities. This improved sentiment was further supported by the Colombo Consumer Price Index (CCPI; Base 2021=100) for the month of July coming in at -0.3% (point-to-point), marking the 11th consecutive month of deflation. The combined effect of easing external trade pressure and continued deflationary signals led to a pronounced repricing of risk. This movement was closely matched by optimism in the local equity market and international markets as well. As a result, secondary market two-way quotes closed lower on a week-on-week basis, accompanied by a clear downward shift of the yield curve.