Interview: Attractive returns on Sri Lanka bonds due to volatility

Jan 20, 2016 (LBO) – Out of emerging markets, Sri Lanka bonds offer well above average returns through trading opportunities due to strong volatility, a market participant said.

Data shows rupee treasury bonds posting more than 25 turning points last year, a clear sign of volatility in the secondary market. Swings of between 25 to 100 basis points during such turns is possible.

In October, 10-year bonds offered yields of 10.25 percent, which dropped to 9.50 percent within two weeks. This is a 4.6 percent capital gain, and an annualized return of 129 percent.

This month, 10-year yields fell to 10.35 percent from 11 percent within a week. This is a return of 3.5 percent, when annualized works out to 182 percent.

“Many of our clients made above average returns last year. Providing an advisory role, we allow customers to leverage and take trading positions,” Kasun Palisena, chief executive of Perpetual Treasuries, said.

Investing in Sri Lanka bonds in the secondary market can be done in multiples of 50 million rupees, with 10 percent of bonds outstanding available to foreign investors.

Several foreign funds have taken positions in Sri Lanka bonds in recent years such as emerging market funds of Franklin Templeton and Aberdeen.

Sri Lanka’s Central Bank tightened the Statutory Reserve Ratio last month citing rising inflation, after the US tightened interest rates. It is expected to watch for signs of inflation and international policy direction in coming months.

This week, the chances of the US Fed hiking interest rates in March fell to 40 percent. The island’s bond yield curve, which may have made an exaggerated move upwards, has begun to correct.

Palisena said Sri Lanka 10-year bonds provide some of the highest returns in the Asia Pacific, at 10.35 percent, while Indian treasury bonds, sought after by foreign funds these days, offer 7.8 percent.

Indonesia 10-year bonds yield 8.5 percent and Pakistan bonds yield 9.1 percent.

US 10-year treasuries, in comparison, offer 2.04 percent, Japanese counterparts 0.2 percent, China 2.7 percent, Philippines 4 percent and Malaysia 4.1 percent.

“Sri Lanka has never defaulted on sovereign debt, and with several foreign and local banks operating in the island, the market is well regulated,” he said.

Sri Lanka raised 1.5 billion dollars in a sovereign bond issue in October, an issue oversubscribed 2.2 times, priced at 6.85 percent. The island is expected to go to international markets this year to raise a similar amount.

“It was a capital outflow that triggered a balance of payments deficit last year. We expect a flow of capital back to emerging markets this year,” Palisena said.