Sri Lanka’s first dollar sovereign bond fund poised for global investors

• Records a 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 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% in March to 7.55% in June, while the same bond now trades at a yield below 7.25% reflecting an improvement in the country’s financial stability.” 

Ceylon Asset Management 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, which resulted in a Country Rating downgrade from B+ to B, alarmed foreign investors and trading yields spiked to a record 9.07% on 28 November 2018, on the 10-year 2029 SL ISB. 

The tragic 21 April terror attacks this year resulted in increasing 2029 bond yields from 7.03% to 7.93% before it reversed back to 7.25% 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 stabilise the rupee. In 2019 the CBSL raised $ 4.4 billion through Sovereign Bonds, while facing debt repayments of $5.9 billion.

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.”

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% 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,” Preiss stated. 

The CDBF is managed by Ceylon Asset Management 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 $1,000. Investors can exit at any time without penalties, and repatriate dollars without the need for an SIA account. 

The CDBF is the only dollar denominated Unit Trust in Sri Lanka licensed by the Securities and Exchange Commission (SEC) and approved by the Central Bank. The Fund Manager, CAM is an associate company of Sri Lanka Insurance Corporation Ltd. (SLIC) and manages 7 other LKR Unit Trusts including equity funds and fixed income funds.