Sri Lanka to sell 30-year long bonds

May 29, 2013 (LBO) – Sri Lanka is selling 30-year long bonds for the first time this week which fill a need for long term gilts, help better manage the state debt stock and extend a risk free yield curve, officials said. We think it is a good time,” Central Bank Nivard Cabraal said. “There will be plenty of long term investors because they know that interest rates would trend down in the future.”

“Then from the governments point of view it will help them to better manage their debt stock, by moving maturities to the higher range,”

A unit of Sri Lanka’s central bank, the department of public debt manages and issues debt for the Treasury. It is offering 2.0 billion rupees of 30 year bonds maturing on June 01, 2043 with a coupon of 9.0 percent at an auction on May 30.

Market participants welcomed the move.

“A 30-year bond is the need of the hour,” Mangala Boyagoda, a veteran debt market specialist, who helped found WealthTrust Securities, which deals in gilts said.

“The government is trying to raise long term funds. In the meantime, insurance and other investors are looking for longer term investments.”

“At least a part of their portfolio they can invest and hedge against interest rates risk. We have seen huge volatility in interest rates.”

Cabraal said in addition to pension and insurance funds who would demand it most foreign investors could buy them subject to their overall ceiling of 12.5 percent of outstanding government securities.

Industry officials also say that the 30-year long bond would help extend the yield curve beyond five years, which has been the most popular, setting a benchmark for corporate debt.

In the past government bonds had been issued up to 20 years but they have been sporadic.

“This is a very good move,” Gihan Hemachandra, head of Capital Alliance, a primary dealer said.

“It will help extend the risk free yield curve. That in turn will have benefits for the corporate bond market as there will be an indicative rate.

“But this needs to be continuous. There has to be continuous supply even in small volumes.”

In Sri Lanka partly due to the volatility in rates, which is triggered by state overspending, especially using credit to manipulate energy prices which more often than not triggers balance of payments crises, interest rates in the island have been volatile.

As a result many bond investors are focused on the short term. But it may change.

“While this may have a limited immediate impact it will create a longer financial background for debt,” Jehan Ismail, chief executive of First Capital group said.

“And eventually people will start trading.”

On Tuesday a five year bond maturing on April 01, 2018 was quoted at 11.08/12 percent. A 19 year bond maturing on 2032 was quoted around 11.90/12.10 percent.

Industry analysts say the 30-year bond may sell for between 12.00 and 12.50 percent.

Update II