Sri Lanka’s ISB yields jump ahead of July bond settlement

The yields of Sri Lanka-issued International Sovereign Bonds (ISBs) jumped last week ahead of next month’s settlement of a billion dollar bond with the biggest increase seen in the bond maturing on July 27, 2021 as investors grow cautious of the country’s ability to honour its foreign debt obligations.

The yields rose across the board of all the outstanding ISBs issued by Sri Lanka, but the yield at the bond maturing next month rose the most to 20.56 percent from 16.22 percent in the previous week.

The bond maturing next on January 18, 2022 also rose from 12.50 percent to 14.26 percent. 

Bond yield rises when the prices drop as bond prices and yields are inversely related.

Sri Lanka’s ISB yields declined in April after the country secured the US$ 500 million facility from China Development Bank strengthening its external buffers. 

The country also has an undrawn swap line worth US$ 1.5 billion secured with People’s Bank of China—China’s central bank—to meet any exigencies. 

Sri Lanka has reiterated that it would maintain its clean debt repayment record, but the country is confronted with fresh challenges due to the decelerating inflows from merchandise exports as exporters are hamstrung of their operations due to COVID-19 related restrictions, which have prevented them from operating at their optimal capacity. 

Meanwhile, the near term prospects for direct investments also remain dim due to the self inflicted economic crisis created by the authorities since the third week of April by re-imposing harsher restrictions on economic activities which sent prices soaring and poverty levels up. 

Credit rating agency ICRA Lanka last week cautioned of a looming external sector crisis due to rising global commodity prices such as oil and metal, and the slowing export earnings.

Sri Lanka’s external sector reserves lost about a half billion dollars to end up at US$ 4.0 by end of May, barely sufficient to cover three months of exports. 

However, Fitch Rating said the country would overcome the near term debt challenges although the medium term debt service pressure would persist.  

The authorities are expecting to take receipt of US$ 200 million via a swap line entered into with Bangladesh’s central bank in less than a month while they will also re-enter into a US$ 400 million swap line with the Indian Reserve Bank. 

The country also could benefit from the allocation of US$ 780 million under the planned IMF SDR available for Sri Lanka in August propping up its reserves temporarily.

Sri Lanka’s ability to collect dollars to rebuild reserves out of non-debt creating inflows greatly waned due to slowing inflows into the trade and current accounts and rising imports due to high oil prices.