Lankan sovereign bondholders re-evaluate initial reaction as yields recover

The holders of Sri Lanka’s sovereign bonds, who overreacted to the resurgence of the virus in October, appear to be re-evaluating their action as yields moderate and prices rise, according to the rating agency, ICRA Lanka. 

“Yields on international sovereign bonds (ISBs) started to moderate throughout the month (November) as investors reevaluated their initial reaction to the second wave,” the rating agency said in their most recent commentary on the Sri Lankan economy. 

According to ICRA Lanka, ISB with the nearest maturity falling on July 27, 2021, saw its yields dipping by 2,000 basis points (bps) while the bond with the longest maturity on March 28, 2030 saw its yields declining by 130 bps. 

All three global rating agencies have downgraded Sri Lanka’s sovereign rating within a span of nine months over elevated debt repayment risks. The government has rubbished these rating action calling them flawed and unwarranted. 

State Minister of Money & Capital Markets and State Enterprise Reforms Ajith Nivard Cabraal in a recent statement expressed his dismay over the supposedly “independent” rating agencies, which appear to be in a hurry to predict a debt crisis no sooner the new government took office in November 2019.

According to Cabraal, while a section of investors, who got panicked by the rating downgrades, suffered losses on the ISBs by selling them at significant discounts, another section of investors including Sri Lankan investors, made substantial gains on both the October 2020 bond as well as the up-coming July bond, by disregarding the doomsday scenarios predicted by the rating agencies.

Sri Lanka has 13 outstanding sovereign bonds with a total value of US$ 14.5 billion falling due through March 2030, under US$ 1.5 billion per annum. For the first ten months, Sri Lanka has narrowed its merchandise trade deficit by US$ 1.6 billion.