Easing interest rates cheer Sri Lankan bond investors

Monday, 9 December 2013 00:15 - - {{hitsCtrl.values.hits}}

By CRISIL Research Even as the world braces to ring in 2014, bond investors in Sri Lanka have been cheering a fall in interest rates. The last quarter has seen interest rates across government securities (G-Secs) easing 100 to 150 basis points (100 basis points = 1 percentage point). This is attributed to the moderation in inflation measured by the Colombo Consumers’ Price Index (CCPI).The barometer declined significantly to 5.6% in November from 6.7% in October on a year-on-year (YoY) basis, the lowest level recorded since April 2012.

Interest rates (or yields) on bonds and their prices are inversely related. When interest rates fall, the value of a bond portfolio rises, benefiting investors. The NDBIB-CRISIL indices, the only fixed-income indices that track the performance of the G-Sec market in Sri Lanka, also indicate similar trends. The NDBIB-CRISIL 91-day T-Bill index and the NDBIB-CRISIL 364-day T-Bill index have given point-to-point returns of 2.25% and 3.45%, respectively, during the last quarter. Similarly, the NDBIB-CRISIL three-year T-Bond index and the NDBIB-CRISIL five-year T-Bond index have given point-to-point returns of 6.28% and 7.81%, respectively. The NDBIB-CRISIL indices have been able to capture the performance of a fixed-income portfolio in an easing interest-rest regime and to that extent the indices are believed to be sentiment indicators of the fixed-income markets in Sri Lanka. The sharp rise in the index values specifically over the last one week indicates that the market has factored in a possible cut in key rates by the Central Bank of Sri Lanka when it reviews the monetary policy today, 9 December. All eyes are now on the Central Bank’s monetary policy review scheduled for today, which will decide whether the bond investors continue to hold on to the cheer. [For details on NDBIB-CRISIL indices please visit http://crisil.com/capital-markets/indices.html].