GOJ to pay out J$62b to bondholders
Published:Sunday | February 19, 2012 | 12:00 AM
Marcella Scarlett, Business Reporter
This week, more than J$62 billion of liquidity will flow into the market in payouts from the Government of Jamaica.
A fixed rate bond is to be floated by the Government to sop up some of those funds, but bond traders at Sterling Asset Management say investors are unlikely to subscribe to the offer unless the monetary authority cuts rates ahead of the offer.
The terms of the bond have not yet been disclosed, but Sterling says the current yields on GOJ debt makes fixed rate offers unattractive, and that investors may be inclined to park their funds in Bank of Jamaica CDs until something better comes along.
The PSOJ yield curve for the week of February 3, 2012 shows that that fixed rate instruments are yielding between 6.74 per cent on the shorter end and 11.39 per cent for a bond maturing in 2040. Variable rate bonds have yield ranging between 7.41 per cent and 7.72 per cent.
"All that needs to happen is for BOJ to cut their repo rate," said Dave Cameron, manager of the fixed income portfolio at Sterling Asset Management.
Unattractive offer
"If the BOJ drops the CD rate from 6.25 per cent by about 50 basis points, then this makes the fixed rate more attractive and people may be encouraged to buy in," added Managing Director Charles Ross.
"As is now, that is if the rate is not reduced, rather than buying the FR, people will just buy in the BOJ CD and wait for the variable rate to come," he said.
Past trends have shown that when the BOJ cuts its CD rate, the secondary market respond by also cutting interest rates, cementing the downward trend in interest rates, which Ross suggested would continue to force financial institutions to offer loans at lower rates.
Roy Reid, manager of client portfolio and investment strategies at JMMB, said he is expecting that some amount of the money will flow back into the GOJ bond, "no matter the terms of the bond". But he acknowledged that there are others who "will be risk averse and may look to the international market" for bonds with higher yields.
"Some people may look elsewhere to buy to hold to maturity, especially if their objective is for income," Reid said. "We may have some who prefer to stay short due to the IMF agreement. If people can afford to stay liquid until the dust is settled I think they will," he said.
He disagrees that the BOJ should reduce policy rates without weighing inflation, but says if the central bank were to cut rates it should not be an aggressive, that is, "at worst 25 basis points", which would bring the BOJ CD rate down to 6.0 per cent.
The fixed rate bond will be offered over the period February 22-24.
The J$62.13 billion of payouts scheduled to be made February 24 comprise J$29.14 billion of interest payments and J$32.99 billion of maturities.