The 30 Year Bond Issue By The CB Governor – The Issues Involved
R.M.B Senanayake
The Central Bank Governor has admitted that there was a failure by him to communicate with the market. Financial markets operate on information which is why the leakage of inside information and trading on insider information are considered criminal offences in financial markets. Raj Rajaratnam was caught and jailed in USA for this offence as did several others before. But such offences have gone unpunished in the local stock market despite the efforts of Mr. Tilak Karunaratne the former Chairman of the SEC. Rogue traders got rid of him and carried on with impunity. Why Inside information disclosure and trading on such information is treated as crimes is because the gains of one person is a loss to others. Financial market profits are a zero sum game as economists point out.
The Primary Dealers were created by a former Governor ( A.S. Jayawardene I think) because the banks which took up all the Treasury bond and bill issues did not show any enthusiasm to market them to the public. This has implications for monetary policy since holdings by banks is money printing while holdings by the public come from genuine savings of the people. The market was a creation of the Central Bank and the Bank nourished and supported it. The Central Bank was not concerned only with the rate of interest but also to gather the maximum amount possible for the government. If it was only interested in a competitive price it should limit the issue to about Rs 500 million which is the capacity of the market. Some one might say that the primary dealers have made bids for much more. But many of those bids at high interest rates are spurious and they submit them without expecting them to be expected.
The Tender is not a public auction with open outcry as used to prevail in the stock market prior to electronic trading. Nor is it a private placement. The quantity on offer is always beyond the capacity of any individual primary dealer. Only the banks would have the capacity to bid for high quantities but the primary dealers have to be sustained if the objective of monetary policy to tap the savings of the public through the creation of a secondary market in the bonds is to be achieved. It is therefore not a public auction where the Central Bank is interested in obtaining the most price and not the volume. It wants both the maximum volume at the best prices. So the Central Bank has been guiding the market to bid at levels which the Bank thought were acceptable. So the Public Debt Department contacts the primary dealers and guides them about the acceptable range of interest rates. The bank gives guidance on the range of interest rates acceptable to it. Somebody has misunderstood the working of the process and thought the Central Bank is only interested in getting the most competitive price.Read More