GLOBAL money managers are turning to Sri Lanka’s local-currency government bonds as a catch-up trade in the country’s red-hot debt market on optimism for a restructuring deal.
JPMorgan Asset Management has actively rotated into rupee securities from US dollar-denominated holdings over the course of the year in one of its Asian total return funds, said Jason Pang, a senior portfolio manager. T Rowe Price Group expects the local bond trade to run further with modest currency gains and domestic rates bolstering demand, according to portfolio manager Leonard Kwan.
For Pang, a normalisation in inflation and a stabilisation in foreign reserves and balance of payments as a result of an International Monetary Fund (IMF) deal would be positive for the onshore bond market.
“Initially when we are scaling in, we went with the US dollar debt, but as sort of the time proceeded and things got better then we actually rotated parts of that into Sri Lankan government bonds,” Pang said.
Sri Lankan dollar debt has been on a tear amid optimism that the nation can successfully rework US$12 billion in defaulted global bonds. A Bloomberg gauge of the hard-currency notes has jumped about 17 per cent year to date, the second-best performer in the region after Pakistan. A gauge of local debt markets from ICE Bank of America (BOA) has lagged somewhat, up just 6 per cent.
A spate of positive developments has buoyed sentiment recently, not least Sri Lanka securing initial approval for a US$337 million payout from the IMF in March. Authorities have also reached in-principle agreements with China, India and the Paris Club while fresh assurances from the finance minister have added to the mood music.
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Meanwhile, data showed the Sri Lankan economy expanded for a second straight quarter, while the central bank unexpectedly cut rates after inflation eased for the first time in five months. In 2022, months of protests over soaring prices, shortages of food and fuel and lengthy power cuts toppled the government and led to the first sovereign debt default since independence in 1948.
Pang, who prefers shorter-dated local paper, says investors can get paid 12 per cent “true yield” in contrast with US dollar bonds where investors get paid zero on accrued interest in default. “I’m sure every investor wants the negotiations to be done soon, but I like the idea more of getting paid true yield while I wait.”
The yield on ICE BOA’s index of local Sri Lankan bonds was about 11 per cent last week, according to data compiled by Bloomberg.
For T Rowe’s Kwan, an emerging-markets fixed-income portfolio manager in Hong Kong, currency was another factor attracting him to local government bonds. He sees more upside in the Sri Lankan rupee, which has strengthened around 8 per cent this year.
“Sri Lanka ticked a few boxes for us in the sense of cheaper currency, elevated rates, improving fundamental outlook,” he said.
While most of the hope of an IMF deal has largely been priced into the nation’s dollar bonds, both Pang and Kwan agree that the road to recovery will likely take shape over a longer period of time and the local debt remains a buy.
“The income is sufficiently attractive in a world where global central banks are cutting policy and if that rate is sufficient to anchor volatility in the currency, then it is actually a position that we could run for an extended period of time,” Kwan said. BLOOMBERG
