Sri Lanka bond prices to be made transparent

July 14, 2010 (LBO) – Sri Lanka’s bond prices will be made more transparent and a sovereign yield curve for the country is being developed with the country’s central bank Bloomberg, an international financial news and information provider said. The yield curve has become more market driven of late though some state-centric incestuous practices such as a prohibition of any government controlled connected institution to go through private primary dealers to bond auctions still remain.

Market participants say the published yield curve has not had wide acceptance with only some maturities being actively traded and some uncertainty about the reported data.

Some market participants use their own yield curves to mark to market portfolios with some cautious players using the lower of their own index or the published index to value their assets.

Price Data

Lahiry says five market participants made up of banks and bond dealers are now giving information to Bloomberg.

Bloomberg is compiling a composite price for bonds using data provided by contributors. Outliers or extreme quotes are automatically eliminated in developing composite prices.

“Composite Bloomberg prices are essentially much more reflective of where the current market is,” Lahiry said.

“This is not an end of day price. These prices keep shifting as markets move. These prices are as good as the contributions we get. I am not suggesting that these are the best prices on back of five contributors but these prices will get better as we get more contributors.”

In Sri Lanka bonds are traded over the phone. Bloomberg says its E-bond system which is available through its terminals can match order automatically.

Bloomberg terminals have other facilities for electronic trading and data capture including generating order tickets for voice trades, which can also be coupled to a back office settlement system.

Trading Platform

Sri Lanka’s central bank has a real time gross settlement system and a central depository that can deliver documents against payment, though there is no electronic trading in bonds.

“We now need an electronic trading platform and real time information dissemination system to take the bond market to the next level,” says Ajith Fernando from Capital Alliance, a primary dealer in government securities.

“Central bank has provided the basic infrastructure that we need and this is what the market should provide on its own.”

Bloomberg’s Jennifer Khong says the system can also value portfolios bond portfolios in real time and allow advance risk management capabilities.

The firm has developed country pages for Asian countries working closely with individual monetary authorities. In Pakistan even bond auction bids are placed through the system.

Sri Lanka has issued two dollar denominated sovereign bonds and has over 40 different rupee bonds, some of which have been bought by foreign investors. Foreign bond buyers hold about 10 percent of total outstanding bonds. “We have dramatically increased contributions from market participants,” Sudipto Lahiry, a Bloomberg fixed income specialist told a bond market forum in Colombo.

“We are working on developing a sovereign yield curve for Sri Lanka, in conjunction with the central bank.”

Central Bank’s deputy governor P D J Fernando said the central bank was keen to make more information available about Sri Lanka to the outside world and is working with information service providers to make it happen.

Development

Sri Lanka has government bonds with maturities up to 2018, but market price quotes are sketchy.

A yield curve is published by the Central Bank, which has been driving the bond market, establishing primary dealers, conducting auctions and gradually lengthening the maturities of securities from the mid 1990s.

A unit of the monetary authority issues government debt. The promotion of a bond market was part of an overall effort to end financial repression, build an effective rate transmission mechanism for monetary policy and bring down inflation.

But from 2004 Sri Lanka’s government bond markets was hit by heavy handed financial repression as the state went on a deficit spending spree and trading volumes in government securities plummeted.

Rate manipulation and money printing eventually triggered high inflation, channeled savings into unauthorized deposits takers, fired a property and financial bubble which eventually ended in the collapse of a number of firms when the bubble burst.