Govt. raises US$ 100 mn via development bonds as authorities ramp up borrowings

In another round of dollar funding, Sri Lanka raised US$ 100 million through Sri Lanka Development Bonds in multiple tenors, going up to 5 years at an auction held from June 19 to June 25 amid authorities ramping up borrowings as pandemic narrowed other options to tap in to foreign borrowings.   

The issuance made by the Central Bank on behalf of the government was largely considered successful as it received bids amounting to US$ 145.1 million, well over the amount offered to raise US$ 100 million. 

Treasury Department last week called for proposals to raise a further US$ 500 million via a foreign currency financing facility for one year to finance the expenditure approved in the vote on account for the fiscal year. 
Since March, Sri Lanka has increasingly resorted to non-market sources such as borrowings and swaps and engaged with bi-lateral and multi-lateral partners as access to international capital markets have been made challenging by the pandemic induced market unease. 

Meanwhile, traders said the yields offered by the dollar bonds, which were in the range of 5.7 percent to 6.87 percent, were very attractive given the near zero yields offered for dollar 
assets elsewhere. 

Even the rates stand attractive compared to rupee rates, which are also hovering around these levels.
This sentiment is also seen from the near-absolute preference to fixed rate bonds across all four tenors as investors locked-in their funds at fixed rate bonds given the expectation that dollar yields would fall in the future. 

While the Central Bank received bids worth US$ 63.13 million for bonds maturing in 7 months, it accepted only US$ 50 million at an average yield of 5.70 percent.

Meanwhile, the Central Bank accepted bids worth US$ 32.72 million at a yield of 6.67 percent, out of US$ 45.48 million bids received. 

Further, the Central Bank accepted US$ 8.40 million and US$ 8.88 million respectively— half the amount of bids received under each tenor—1 year and 9 months tenor and 4 year and 7 months tenor at 6.74 percent and 6.87 percent.    

Earlier this year, Sri Lanka exempted investments in Sri Lanka Development Bonds from income tax with retrospective effect (from April 2018), making investments in the asset class more attractive than before. 

The move resulted in higher earnings in banks, as banks were one of the leading investors in SLDBs.