First fixed income indices debut today

By Cheranka Mendis

Sri Lanka will today embark on a new journey in the country’s debt market with the launch of a family of fixed income indices, courtesy of National Development Bank (NDB) Capital Holdings Plc and CRISIL Ltd., India.

A first for Sri Lanka, the indices will measure the performance of Government securities and selected maturities and are expected to provide more clarity to the debt capital market participants while propagating Government securities as attractive investment opportunities for investors both here and abroad.

Co-branded, using the names of Sri Lanka’s premier investment bank and fully-owned subsidiary of NDB Capital Holdings, NDB Investment Bank Ltd., and industry specialist S&P Group’s CRISIL, which was the body that developed and will be maintaining the indices, the four indices covers two selected maturities each for both T-bills and bonds. The indices are titled ‘NDBIB-CRISIL 91 Day T-bill Index,’ ‘NDBIB-CRISIL 364 Day T-bill Index,’ ‘NDBIB-CRISIL 3 Year T-bond index,’ and ‘NDBIB-CRISIL 5 Year T-bond Index.’

NDB Chairman Hemaka Amarasuriya said yesterday that for Sri Lanka to begin an actively mobile and inclusive capital market, T-bills and bonds have to be frequently traded and change hands by leveraging, etc. Therefore the launch of Government security indices is with the intention of disseminating information regard to interest rates and values at any given date and time for this instruments. In other words, availability of an index would enable participants to measure the performance of Government securities through a structured professional format, Amarasuriya said.

“Availability of information will create public interest for T-bills and bonds which are relatively unknown to the public today,” he expressed. “It is also an invitation to increase foreign participation and with that enhance the flow of foreign funds in to our marketing system.”

Covering periods of 91 days to five years, the indices initiative is expected to create a development of a yield curve, where corporates can forecast future interest rates over the particular period of time providing a greater flow of foreign investors and foreign funds to the local market. An emergence of a future corporate bond market which will be followed by listed corporate counters is also anticipated.

Admitting that one of his long term dreams was to have a Singer bond traded in the market, Amarasuriya expressed that even though his dream did not materialise, he hoped that at a later stage, blue chip companies such as Softlogic, John Keells, Aitken Spence, Dialog, Sri Lanka Telecom – “the big boys” – would start issuing corporate bonds.

“NDB, arguably the most innovative and versatile banking conglomerate in Sri Lanka, once again is at the forefront of innovation as we prepare to launch an initiative which is a prerequisite to the future development of capital markets in Sri Lanka,” he said.

“Tbills and bonds are integral to the monetary resources within our capital market. These instruments generate much-needed capital and cash inflows into the Treasury for recurrent expenditure on the budget. The instruments lie in the hands of buyers such as insurance companies, pension companies, provident funds, banks, etc., until maturity has passed.”

The Government securities and bond market is the largest and the most liquid market for fixed income securities in Sri Lanka with an outstanding Treasury amounting to approximately Rs. 3.2 trillion. With the Government allowing foreign participation in rupee-denominated Treasury securities, there has been a significantly high demand from foreign investors for Treasury securities and hence the need for measurement of performance of Government securities.

NDB Capital Holdings CEO Vajira Kulatilaka noted that the indices are a necessity for the growth and development of Sri Lanka’s T-bills and bond market, which was initiated in 1941. “Government bond and T-bills markets have grown and, on top of that liquidity has improved. It is the most liquid market in the country. Unfortunately, there have been no indices up till now to show the growth of the market,” Kulatilaka said.

With debt market having grown by 21% during the period 2003-2011, he noted that foreign interest in the market was steadily improving and that they were now looking for Sri Lankan rupee bonds.

Size-wise the Government bond and T-bill market is 1.5 times more liquid than the share market, which has many indices as opposed to the former, he said. “On the other hand, benefits of share market are limited but benefits of Government bills and bonds go down to the grass root level through EPF, ETF, Provident Funds, Insurance Fund, etc.,” he said.

“There is a real need for the indices. The Government in the Budget clearly sees this and preference has been given to create a capital market with a vibrant corporate bond market. The base for the corporate bond market to take off is Government bonds and bills.”

Noting the need for indices, Kulatilaka asserted that the figures in indices were user friendly identified as a risk-free rate. “A risk-free rate of an economy is the benchmark for valuations. It creates a valuation base to carry out the valuation of an asset in the market. When there are benchmarks, you cannot lie to the market – it is an important base to judge the performance of fund managers. You can find out which asset to invest in based on scenarios that you expect to take place in the future. It is important in the asset allocation and the vibrant capital market to function in,” he explained.

The collaboration with CRISIL, India’s largest independent and integrated research house with over 50,000 customers in India alone, and a much wider network of global customers, is also because India is not too far behind Sri Lanka in the indices avenue, which will help Sri Lanka grow and prosper from learning from India. “India is not too far ahead of us and it would help us find the problems.”

He also noted that with some of the problems that occurred in making the indices, another develop country party would have left without completion. “We have problems; difficulty to find data and information being among the key issues. CRISIL knows to find the secondary information and construct indices.”

Among those who stand to benefit from the indices, practitioners can take the benchmark and assess future expectations and create asset allocations. The huge information value and awareness creation as to where the interest rates are moving can support stakeholders, he said and expectations also lie in the hope of various sponsors issuing index-based funds and advertising the use of indices to suit investments. “When you create indices, they are the base of derivatives. You can create derivatives on top of the indices and base it on this.”

The indices will represent the performance of risk-free benchmark securities and help carry out the performance evaluation of funds with a fixed income orientation and provide value in terms of being indicators of the aggregate performance of the Government securities market in the country. This will also facilitate the launch of index tracking funds, which would be a boon to the Government securities market and enable construction of derivatives linked to them.

NDB and CRISIL are said to have carried out wide consultation with market participants, including banks, primary dealers, regulators, money brokers, and fund managers, to obtain feedback and to fine-tune the index construction methodology to suit local market conditions.

“We have been actively involved with banks for various risk management and trading assignments for the last five years in Sri Lanka,” CRISIL Research President Mukesh Agarwal said.

Commenting on the indices, he noted that it was important to have benchmarks to measure performance. “We believe that appropriate benchmarking performance is a critical requirement for all stakeholders, which include regulators, fund managers, trustees, researches, and investors. They can use the indices to do attribution analyses. It will also help investors and wealth managers to measure performance and based on that they take asset allocation resilience.”

Having pioneered the development of indices in the capital markets of India, he noted that the launch of the indices would support the development of the Lankan debt markets by providing investors with a credible and independent measure of the risk-return characteristics of Government securities. “This initiative is another extension of our efforts to make markets function better,” he said.