Sovereign Bond Yield Strengthens To 6.82%, Yet At Discount To Buyers

  • NSB’s Proposed $ 1 Bn. Bond, At What Price?

By Paneetha Ameresekere

Government of Sri Lanka’s (GoSL’s) 10 year US$ ($) 1 billion Sovereign Bond  maturing in 2022 which fetched a yield of 5.875% when it was sold to overseas investors in the primary market last year has since seen its yield increase by 105.5 basis points (bps) to 6.82% in secondary market trading around 1.10 pm local time on Thursday (June 27) after some investors saw a safer haven in US markets while simultaneously exiting from the GoSL $ bond in recent times, sources told this newspaper.

However on Thursday it had weakened to 7.42%. But it has since strengthened by 60 bps due to renewed buying interest as the recent economic data out vis-à-vis the US economy has not been strong.

“So there is a belief in the market that the Federal Reserve System’s Quantitative Easing (QE) programme will continue and in fact won’t end, as previously thought,” market sources told this newspaper.

Continuity of the availability of cheap money in the USA has given an assurance to investors that it’s still worth investing in Sri Lanka’s high yielding 2022 bond. Such buying pressure has caused its yield to contract. At the beginning of the week this bond fetched a yield of 7%. Its continued expansion however has been checked since.

The lowest that this bond yield has hit in secondary market trading, regarded as a premium rate to holders, was 4.5%, before weakening since. Bonds strengthen when there is buying pressure and weaken when there is selling pressure.

Its rapid yield increase prior to Friday coincides with Fed. Chairman, Ben S. Bernanke’s recent statement that the Fed., from next year will taper off its QE programme due to US economy being on a recovery mode.

That had also resulted in the yield of the more popular 10 year US treasury increasing by 160 bps to 2.60% during this period due to selling pressure because of fears then that with the possibility of the USA’s QE coming to an end, that it will cause liquidity pressure in the US market.

According to reports, investors have also been exiting from the 10 year US treasury and investing in US stocks, another reason for the weakening of the 10 year US Treasury bond.

Virtually all emerging market bond issues, such as from the Philippines and Vietnam, in secondary market trading have had taken a hit, therefore this hit is not confined to the 2022 Sri Lanka sovereign bond alone, they said. Yields are falling apart, the sources said.

This increase in yields also comes in the backdrop of state run NSB planning to raise $ one billion on behalf of GoSL in the context of GoSL suffering from a trade deficit and challenges it faces to overcome balance of payments (BoP) difficulties, other than by external borrowings to mitigate this shortfall, such as by raising $ one billion through NSB.

But when investors flee from emerging markets such as Sri Lanka and seek sanctuary in the US market, like what is seemingly happening now, that will make local bond sales (like that of NSB’s proposed bond sale) more expensive because investors would then demand higher interest rates (yields) to invest in such.

In addition to higher yields demanded by the market, matters are further compounded by a weakening rupee as which is also the case currently, and when it comes to servicing such loans in that context, large amount of rupees would then be required to purchase the necessary $s to service such loans, thereby causing pressure on rupee interest rates to rise due to the diminishment of rupee liquidity from the market, in the context of a weakening exchange rate, coupled with rising debt service commitments in rupee volume terms.

Comments are closed

CG Colombo Gazette

Photo Gallery