SL’s sovereign bonds seen regaining lost value

• Lankan ISBs lost value during April and May responding to COVID outbreak
• But yields have declined sharply now as market volatility triggered by pandemic dissipates 
• SL has outstanding ISBs worth of US $ 15.5bn issued through 14 issuances
• Maturities of such ISBs fall from October 4, 2020 to March 28, 2030

Sri Lanka’s international sovereign bonds (ISBs) are gaining after they lost value during April and May, as the yields have declined sharply from their highs reached during the worst of the pandemic, in a sign that the investor confidence is rebuilding, as market volatility triggered by the pandemic dissipates.

For instance, the yield of the US $ 1.0 billion bond issued at a coupon rate of 6.25 percent, maturing on July 21, 2021, fell to 11.43 percent last week, from 41.37 percent reached in early April, when the pandemic brought a large swath of the global economy to a grinding halt.

However, the bonds are still selling at a discount, compared to the level they were trading before the pandemic. For instance, the above bond is now selling at US $ 93.24 per US $ 100, recovering from US $ 65.38 on April 3. 

A similar pattern can be seen in other maturities too. For instance, another bond maturing in January 2022, issued at a coupon rate of 5.75 percent but trading at a yield of 36.88 percent on April 9, has come down to 10.55 percent on September 4, in the secondary market. 

Bond prices go up when the yields decline as they are inversely related.

Sri Lanka’s secondary market sovereign bond yields, which were hovering near their coupon rates or the primary issuance rates until early March, started rising from the second week of the month, since the identification of the first Sri Lankan COVID-19 patient and have since remained at elevated levels.

The negative rating actions by Fitch Ratings and Moody’s Investors Service in April also may have had a bearing on the yields.  

The yields saw a dramatic increase during the weeks ended on April 3 and April 10, before starting to ease from end-May, with the gradual opening of the global economies. 

Sri Lanka has outstanding ISBs worth of US $ 15.5 billion issued through 14 issuances, with maturities falling from October 4, 2020 to March 28, 2030.

The country is scheduled to settle its 10-year, US $ 1 billion maturing next month out of its foreign exchange reserves. This was Sri Lanka’s third sovereign bond issuance since the country started raising funds in the external capital markets in 2007. 

By end-July, Sri Lanka had US $ 7.1 billion in reserves, sufficient to cover 4.7 months of imports. 

Sri Lanka’s access to international capital markets was impaired due to the volatility caused by the pandemic but the Central Bank plans to return to the market either towards the end of this year or early next year, as it seeks to rollover part of the country’s foreign debt. 

Sri Lanka’s exports have picked up faster than expected and have reported a near billion dollars in earnings from merchandise exports in August, the third such month in a raw. Meanwhile, the expenditure on imports remains subdued on controls on non-essential imports, helping the country to offset the negatives stemming from the loss of income from tourism.