Investment managers globally are shifting their focus towards Sri Lanka's domestic government bonds, driven by the anticipation of a favorable restructuring agreement. This move comes as the country's debt market experiences a surge in interest, highlighting the potential for significant returns.
JPMorgan Asset Management has been reallocating its investments from dollar-denominated assets to Sri Lankan rupee securities within its Asian total return funds throughout the year, as stated by Jason Pang, a senior portfolio manager at the firm. Similarly, T. Rowe Price Group Inc., through portfolio manager Leonard Kwan, predicts the local bond market will continue to flourish, supported by modest gains in the currency and a strong demand bolstered by domestic interest rates.
Pang noted that the initial strategy involved investing in US dollar debt, but as the economic situation in Sri Lanka improved, there was a strategic shift towards local government bonds. This adjustment was influenced by a decrease in inflation and a stabilization of foreign reserves and the balance of payments, buoyed by an agreement with the International Monetary Fund (IMF).
Despite the soaring performance of Sri Lankan dollar debt, driven by optimism around the country's ability to renegotiate $12 billion in defaulted global bonds, local debt markets have seen a more modest increase. Recent developments, including Sri Lanka's preliminary approval for a $337 million IMF payout and agreements with major creditors, have significantly improved market sentiment.
Moreover, the Sri Lankan economy has shown signs of resilience, with consecutive quarterly growth and a surprising rate cut by the central bank following a reduction in inflation. This economic turnaround comes after a tumultuous period marked by protests and a historic sovereign debt default.
Pang, favoring shorter-dated local securities, highlighted the attractive yield offered by these investments compared to the zero interest on accrued dollar bonds in default, emphasizing the appeal of earning a "true yield" during the negotiation process.
On the other hand, Kwan is drawn to the local bonds for the potential upside in the Sri Lankan rupee, which has appreciated about 8% this year. The combination of a cheaper currency, high interest rates, and an improving economic outlook makes Sri Lanka's local government bonds an appealing option for investors.
Both Pang and Kwan agree that while the optimism surrounding an IMF deal has been largely factored into the prices of dollar bonds, the journey to economic recovery will extend over a longer period, making local debt a viable investment option.
Kwan further elaborates that the attractive income from these bonds, coupled with global central banks' policy cuts, could provide a stable investment opportunity amidst currency volatility.
The yield on local Sri Lankan bonds, as tracked by the ICE Bank of America index, was around 11% last week, showcasing the investment potential in the nation's debt market.
