Chinese swap eased bond yields: First Capital

First Capital Research (FCR) this week said foreign currency swap Sri Lanka entered with China had eased the rising bond yields, in an about turn from their previous expectations that the ascent in the yields would continue. 

Sri Lanka’s primary and secondary market bills and bond yields ticked upwards through February on concerns said to have been raised by the reserves adequacy to meet foreign currency liabilities and the lack of clarity among market participants with the current economic condition,” according to FCR.

But the bond markets eased after the announcement of People’s Bank of China approving a swap line of 10 billion Yuan for Sri Lanka, equivalent of US$ 1.5 billion for 3 years on March 10, assuaging the concerns held by some of the investors. 

Providing further clarity on the economy, the Central Bank last week gave a detailed account of the robust progress made by the economy since its re-opening last May, rekindling hopes on higher and better economic prospects through 2021, as indicated by almost every high frequency data.       

        
“Sri Lanka signs 3-year US$ 1.5 billion currency swap deal with China, which may ease secondary market government securities yield over the short term,” said FCR. 

Weighing in on the China swap, Standard Chartered Bank too said that it would boost near term reserves and upgraded their growth outlook for the Sri Lankan economy. 

However, the government earlier indicated that it wouldn’t expect to draw down the facility but rather would keep it as a buffer, and hence it might not get add on to the foreign currency reserves, which was at US$ 4.6 billion by end of February. 

Meanwhile, First Capital’s Fixed Income Economic Health Score, which is calculated by assigning a score for about 11 criteria watched monthly, changed little, reflecting the continuous progress made by the economy. 

The overall score compiled based by assigning individual score for criteria such as foreign reserves, money market liquidity, inflation, private sector credit, investor confidence and the likes made up to an accumulated score of 53 for March compared to 54 in February, with the net slippage coming from the depreciation in the rupee against the dollar, which depreciated by about 7 percent year-to-date. 

The Treasury bond auction held on Monday to raise Rs.60.0 billion via three tenors closed with the Public Debt Department accepting Rs.27.4 billion. 
First Capital Research continued to advice the holders of longer tenor bonds to ‘hold’, a stance which they adopted in February.