By First Capital Research
Maintain in Bond Yield bands: In our last fixed income report on 24 June 2019, we upgraded our expectation in the First Capital Economic Health Score, primarily supported by the successful issuance of US$ 2.0 billion sovereign Bond and possible further issue of additional Bonds amounting to US$ 2.5 billion to manage debt in 2020.
A surge in foreign currency reserves and stability in all other indicators may significantly strengthen macro economic conditions and reduce volatility of interest rates. Accordingly, we maintain our yield curve expectations in the Bond market for the next couple of months.
One-year yield at 3½-year low breaks FCR lower bands: Dips in the one-year yield have broken First Capital Research’s lower band by touching 8.38 per cent, a 3½-year low.
Yields dipped during the last few weeks, primarily led by Sri Lanka’s successful International Sovereign Bond (ISB) issuance of US$ 2.0 billion, offering tenors of five- and 10-year.
Following the issuance, foreign reserves exhibited a significant improvement, reaching US$ 8.8 billion as at end of June 2019. We expect reserves to be maintained above US$ 7.5 billion during August to December 2019.
Reduce exposure in low-yield Bonds: We recommend investors reduce overall portfolio exposure to 45 per cent from 60 per cent.
We recommend to cut 2021 and 2022 maturities of the carrying portfolio amidst the significant reduction in yields, while we also recommend an increase in 2023 and 2024 maturities in the trading portfolio amidst the slight rise in yields.
Additionally, we recommend the carrying portfolio be decreased from 50 per cent to 30 per cent, and the trading portfolio be increased to 15 per cent from 10 per cent.