Sri Lanka usurps Vietnam as Asia’s Bond ‘Darling’

Sovereign bond investors should buy debt of Sri Lanka over Vietnam as the island nation progresses in setting aside three decades of war to record economic growth that outpaces its rival, according to Nomura Holdings Inc.

 “Sri Lanka has become the new darling of the Asian emerging-market space,” credit analysts led by Hong Kong-based Pradeep Mohinani wrote in a 5 October note to clients.

The nation is the “the sovereign story in Asia to dislodge Vietnam, which has lost its allure,” he said.

The island nation south of India, recovering from civil unrest, last month attracted more than $6.3 billion of orders for a $1 billion global bond sale.

The October 2020 notes were sold to yield 6.25 percent, or 373 basis points more than similar-maturity U.S. Treasuries. The spread has since narrowed 15 basis points to 358 basis points, according to Nomura. A basis point is 0.01 percentage point. Narrowing spreads indicate rising bond prices.

Sri Lanka’s $42 billion economy expanded 8.5 percent in the three months to 30 June from a year earlier, the most since 2002, its statistics department said 16 September. The economy may grow as much as 8 percent this year, more than a previous forecast of 7 percent, the Central Bank said last month.

 “The country clearly has the tailwinds behind it,” Mohinani wrote. “We expect the entire Sri Lanka curve to converge to the Vietnam curve in due course,” he said, referring to movements in benchmark yields.

In Vietnam, banks were asked this week to cut deposit rates to no more than 11 percent in an effort to spur growth in the $92 billion economy. The nation’s gross domestic product may expand 6.7 percent this year, Nguyen Xuan Phuc, chairman of the Government Office said on 30 September.

The $1 billion of January 2020 bonds sold by Vietnam’s government in January pay a coupon of 6.75 percent and were issued at a spread of 332.7 basis points more than similar- maturity Treasuries, according to data compiled by Bloomberg. They’re now trading at a spread of 292 basis points, having narrowed 41 basis points, Royal Bank of Scotland Group Plc prices on Bloomberg show.

Dollar bonds in Vietnam returned 7 percent last quarter compared with 6 percent for dollar debt in Sri Lanka, JPMorgan Chase & Co. indexes show.