Softening rates offer bond investors a joyride

Friday, 26 September 2014 00:56 - - {{hitsCtrl.values.hits}}

By CRISIL Research The market is factoring in the Central Bank’s measures seeking to direct excess liquidity to the private sector at more reasonable rates, the sharp rise in NDBIB-CRISIL index values over the last one week appears to indicate. This has also led to expectations that excess liquidity, which won’t be parked with the Central Bank, may flow into T-Bills and T-Bonds, pushing yields down further. The NDBIB-CRISIL indices, the only fixed-income indices to track the performance of the G-Sec market in Sri Lanka, reflect the gains made by bond investors in the country, due to interest rates easing throughout the calendar year 2014. The year till date has seen Treasury bill yields ease by 175 basis points (1.75%; where 100 basis points = 1 percentage point) and Treasury bond yields ease by 270 basis points. The fall in interest rates over the year is reflected in the NDBIB-CRISIL indices, with the 5-year T-Bond and the three-year T-Bond indices delivering year-to-date returns of 18.70% and 14.26% respectively (see table). The 364-day T-Bill index and the 91-day T-Bill index have given year-to-date returns of 6.77% and 5.23%, respectively. Yields on bonds and their prices are inversely related. When interest rates fall, the value of a bond portfolio rises, benefiting investors.

The recent fall in interest rates can be attributed to the Central Bank’s recent policy decision to limit the access of open market operation (OMO) participants to the Standing Deposit Facility (SDF) to a maximum three times per calendar month at the currently applicable SDF rate of 6.5%. Any deposit made by an OMO participant exceeding three times in the calendar month would be accepted at a reduced rate of 5%. Also aiding this fall in yields is a stable period of low inflation as measured by the Colombo Consumers’ Price Index. The barometer continued its steady decline to 4.5% year-on-year in August from 4.7% in July. Further, Sri Lanka recorded a gross domestic product, or GDP, growth of 7.8% during the second quarter of 2014 as opposed to 7.6% in the first. If liquidity continues to be redirected to the bond markets, the joyride would continue for investors. [For details on NDBIB-CRISIL indices, please visit http://crisil.com/capital-markets/indices.html].