Marcella Scarlett, Business Reporter

But dealers promise never to abandon GOJ

The inertia in the fixed income market was first evident in May when a three-year bond priced to yield 7.25 per cent got just J$715 million in subscriptions.

An 11-year variable-rate bond issued at the same time cleared J$3 billion; its yield was more attractively priced at 7.565 per cent.

But together, the two issues vastly underperformed the J$17-billion take-up in April, when investors apparently were desperate for opportunities to park J$60 billion of bond payments in February.

Now analysts confirm that the fixed income market is basically at a standstill as investors keep watch on the outcome of International Monetary Fund bailout talks.

"In all my years in the market, I have never seen such low take-up when they (the Government) come to market," Evette Bryan, treasury manager at Victoria Mutual Wealth Management told the Financial Gleaner.

"Either the market does not have any money which I know is not true or investors are just not interested ... maybe they can find something else to put their funds in," Bryan said.

Still Gary Peart, president of the Jamaica Securities Dealers Association, says "there is money to be made" and that the local market will remain loyal to GOJ debt.

The bet is that interest rates - the three-month Treasury for August rose by eight basis points to 6.36 per cent - will rise after a deal is struck with the IMF.

Investors more willing

Investors are, therefore, more willing to buy variable-rate bonds with the expectation of riding the upswing.

But even more are said to be hoarding foreign exchange in the interim.

The Ministry of Finance's Debt Management Unit (DMU) has tapped the market every month since the start of the fiscal year.

Noticeably, the purchase of Government debt was at its lowest in May with take-up of only J$3.7 billion. This compares to J$17.3 billion in April, J$4.8 billion in June, J$4.1 billion in July and a more robust J$8.85 billion in August.

DMU actually tapped the market four times in August with one of the bonds yielding an anaemic J$405 million in subscriptions on a 10-year reopened benchmark note, suggesting that investors are wary of being tied to long-term issues. The others had take-up ranging from J$1.9 billion to J$4 billion.

Between April and July, the finance ministry paid out J$17 billion in interest and maturities, according to the monthly financial reports published by Heroes Circle.

However, alternatives available to investors in the fixed income market has been limited, evidenced by the non-activity on GOJ global bonds, small take-up in corporate paper, and lowering returns on emerging market bonds, according to analysts polled.

"Right now, you can't even get US$10,000 to buy in the (foreign exchange) market. People are converting to US and holding it. Maybe they will get a higher return on it and maybe they stand to gain more when they convert it back later," Bryan said.

Historical trends

Charles Ross, the CEO of Sterling Asset Management, says investors' unease is based on historical trends.

"The source of people's unease is that in the past when exchange rates were running up and the NIR was running down, the government would raise the interest rates. Nobody wants to invest now and later on they realise their investment is not worth much because interest rates are suddenly so high," Ross told the Financial Gleaner.

He adds that Jamaican investors are not keen at this time to put their money into emerging-market bonds, given the bearish take on the economic performance of places such as China. Emerging markets are expected to grow, but not at the same robust pace as in previous years.

"If we get an IMF agreement, people will say the Government has ammunition to defend the exchange rate so people will have more confidence to invest in local fixed income instruments," Ross said.

He said that there are other options available to the Government to spur investors, one of which is to have the central bank reduce the 30-day BOJ CD rate.

The last time BOJ adjusted policy rates was in September 2011; and that was a cut of 25 basis points to 6.25 per cent.

"Merely getting the [IMF] agreement in place will not solve the problem; it would ease some of the uncertainty, but we don't know what the terms of the agreement are. Yes, people would be reassured because they [BOJ] won't have to raise interest rates, because they will have money to defend the currency," Ross said.

At the end of August the NIR fell another US$55 million to US$1.43 billion, enough to support the country's imports for 15 weeks and still above the international benchmark of 12 weeks.

This compares to the balance at the beginning of the year of US$1.97 billion, which could support 19.7 weeks of imports for the country.

The NIR is coming from a high, post the 2010 IMF agreement, of US$2.6 billion in April 2011.

The Ministry of Finance has always been able to bank on the Jamaican debt market for funds to pay its bondholders.

This year, the finance ministry needs the Jamaican market to pony up J$142 billion; and if the international capital markets are too timid to continue making bets on GOJ sovereign bonds, it will need another J$45 billion from domestic investors.

The markets are becoming increasingly nervous, however, for despite Finance Minister Dr Peter Phillips's confident assurances that the September 24 IMF talks are likely to lead to a bailout agreement agreement later this year, investors are not as sanguine that an IMF deal is on the cards this year.

Still, according to Gary Peart, president of the Jamaica Securities Dealers' Association, the local market is resilient and unlikely to abandon GOJ securities.

The dealers are "not too concerned" about the realisation of an IMF programme, he said, adding that whatever the outcome, "money has to be made".

"Now what will happen is that if you get an IMF programme, then a lot of funding will come from multinational agreements, and we may even get so much where we might start facing possible revaluation," said Peart.

"So right now, people need to be very careful on how they stock up because a lot of them might be buying up more US than they normally need and when the agreement comes in a couple of months and the market is flooded with US dollars, they won't know what to do," Peart said.

The finance ministry raised J$62 billion up to July from domestic sources, according to its monthly operating tables, but its disclosures on its website only point to about J$30 billion in debt raised.

The ministry, up to press time, was still to explain the gap but analysts in two New Kingston-based financial houses explained that when the DMU does not raise enough debt on the open market to meet its target, it normally uses private placements to make up the difference.

Private placements are not disclosed by the ministry.

marcella.scarlett@gleanerjm.com