Analysing the determinants of 10-year government bond yield in Sri Lanka

Abstract

Introduction

The government security market is one of the most fundamental alternate sources of financing which is a debt instrument issued in the form of Treasury Bills and Treasury Bonds by the Sri Lankan state government through the Central Bank of Sri Lanka to raise money for public spending. The yield of the bonds reflects the government’s cost of borrowing and it can act as an indicator of the country’s macroeconomic health. The yield of longterm government securities plays a vital role in shaping a country’s debt sustainability, guiding investor behaviour, and influencing the transmission of monetary policy. In the Sri Lankan context, the 10-year government bond yield is a key benchmark for market expectations regarding inflation, interest rates, and fiscal credibility.

Given the country’s fiscal and monetary developments between 2015 and 2024—including high inflation, exchange rate fluctuations, and debt restructuring efforts—understanding the underlying factors that influence long-term yields has become increasingly important. This research seeks to fill this gap by identifying and examining the determinants that affect the 10- year government securities yield in Sri Lanka thereby contributing to both academic literature and policy formulation.