Solid demand for Lankan ISBs signals potential for strong economic recovery

19 July 2019 12:02 am - 0     - {{hitsCtrl.values.hits}}

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  • SL’s first dollar sovereign bond fund poised for global investors
  • Records dollar return of 8.56% during the first half of 2019
  • Declining interest rates on ISBs reflect SL’s improving financial stability 

 

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 indicates that the worst is over for Sri Lanka. The coupon interest rate on recent ISB issues in 2019 declined from 7.85 percent in March to 7.55 percent in June, while the same bond now trades at a yield below 7.25 percent, reflecting an improvement in the country’s financial stability,” Preiss said.


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. 


Sri Lankan ISB (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 percent on November 28, 2018, on the 10-year 2029 SL ISB. 


The April 21st terror attacks this year resulted in increasing 2029 bond yields from 7.03 percent to 7.93 percent before it reversed back to 7.25 percent as at July 17, due to prudent foreign exchange management by the Central Bank of Sri Lanka (CBSL), following the 2019 budget proposal that helped stabilize the rupee. 


In 2019, the CBSL raised US$ 4.4 billion through sovereign bonds, while facing debt repayments of US $5.9 billion. Globally, investor sentiment towards emerging markets is once again on the rise with veteran emerging market investor Dr. Mark Mobius recently stating that “Investors overseas are hungry for yields with interest rates in America going down”.
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 percent 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,” he said.
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), 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. 


Investors can exit at any time without penalties, and repatriate dollars without the need for an SIA account. 


CAM is an associate company of Sri Lanka Insurance Corporation Ltd. (SLIC) and manages seven other LKR unit trusts including equity funds and fixed income funds.

 

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