Strong demand for Dollar Sovereign Bond paves way for faster Lankan recovery
View(s):Strong demand on the recent issuance of Sri Lankan International Sovereign Bonds (ISB) signals potential for a strong economic recovery according to Ceylon Asset Management (CAM) Director and Economic Advisor, Rainer Michael Preiss.
“The decline in Sovereign Bond Yields indicate that the worst is over for Sri Lanka. The coupon interest rate on recent International Sovereign Bond (ISB) issues in 2019 declined from 7.85 per cent in March to 7.55 per cent in June, while the same bond now trades at a yield below 7.25 per cent reflecting an improvement in the country’s financial stability,” he said in a media release.
CAM competes with international fund managers in operating the Ceylon Dollar Bond Fund (CDBF), Sri Lanka’s first international sovereign bond fund that is influenced by both domestic and global market conditions.
The SL ISB rates were affected last year by the US Federal Reserve rate hikes, the capital flight from Asia to the dollar and the Constitutional crisis in October 2018. Last year’s constitutional crisis that resulted in a Country Rating downgrade from B+ to B alarmed foreign investors and trading yields spiked to a record 9.07 per cent on November 28, 2018, on the 10-year 2029 SL ISB.
“The tragic April 21 terror attacks this year resulted in increasing 2029 bond yields from 7.03 per cent to 7.93 per cent before it reversed to 7.25 per cent as at July 17, due to prudent foreign exchange management by the Central Bank (CB), following the 2019 budget proposal that helped stabilize the rupee. In 2019 the CB raised $ 4.4 billion through Sovereign Bonds, while facing debt repayments of $5.9 billion,” the company said in a media release.
Globally, investor sentiment towards emerging markets is once again on the rise with veteran EM investor Dr. Mark Mobius recently stating that “Investors overseas are hungry for yields with interest rates in America going down.”
Mr. Preiss noted that Sri Lanka ISBs continued to remain popular with foreign investors, enjoying healthy trading liquidity in international markets. “The CDBF has reported a performance of 8.56 per cent during the first half of 2019. CDBF enables foreign investors to enjoy returns from Sri Lanka without exposure to Rupee volatility. SL diaspora investors should also take advantage of this opportunity, with improving market conditions in Sri Lanka.”
“The declining bond yields provide an excellent opportunity for investors to make capital gains on long term bonds. We anticipate that foreign and Sri Lankan investors alike will exploit this opportunity to secure sovereign bond returns,” Mr. Preiss stated.
The CDBF is managed by CAM while Deutsche Bank AG serves as Trustee and Custodian of the fund. Local individual investors who hold a Personal Foreign Currency Account (PFCA) and corporate investors with a Business Foreign Currency Account (BFCA) are eligible to invest in the fund with a diversified portfolio of ISBs, with a minimum investment of US $1,000.