Treasury bill yields in Sri Lanka have fallen sharply across all maturities for the fifth consecutive week, with three-month bills dipping below the central bank’s Overnight Policy Rate (OPR) of 7.75%, reflecting an unprecedented surge in market liquidity. The Central Bank of Sri Lanka (CBSL) reported that liquidity in the system stood at Rs. 282.4 billion as of 18 February, slightly down from Rs. 296.5 billion a week earlier, but more than quadruple the Rs. 66 billion recorded in mid-December 2025. Analysts attribute the decline in yields entirely to this flood of cash in the system.
Dimantha Mathew, Chief Research and Strategy Officer at First Capital Holdings, told The Sunday Morning Business that the yield decline is linked to both a contraction in private sector credit and aggressive CBSL foreign exchange operations. “The central bank has been purchasing significant amounts of US dollars, injecting liquidity into the domestic market,” he said, noting that the CBSL bought $200 million in the latest reported period. Official CBSL figures show that in December 2025, the bank purchased $272.5 million and sold $18.8 million, followed by purchases of $209.8 million and sales of $9.5 million in January 2026, compared with far lower levels of activity in January 2025.
Investor demand at the recent Treasury bill auction further underscored the liquidity-driven decline in yields. The Public Debt Management Office (PDMO) received bids totaling Rs. 172.3 billion for Rs. 60 billion on offer. For three-month bills, Rs. 10 billion of Rs. 30.2 billion in bids were accepted at a Weighted Average Yield Rate (WAYR) of 7.66%, down six basis points from the previous auction. Six-month bills saw Rs. 35 billion accepted from Rs. 97 billion in bids at a WAYR of 7.99%, down eight basis points, while Rs. 15 billion of Rs. 45.2 billion in 12-month bill bids were accepted at a WAYR of 8.27%, a four basis point decline.
The persistent fall in yields below policy rates highlights the interplay between extraordinary liquidity injections, slowing private credit, and investor appetite for government debt, marking a significant development in Sri Lanka’s monetary and financial markets.
