GOVERNMENT of Jamaica Global Bonds yields have dipped 330 basis points so far in 2010 reflecting increased confidence following the Jamaica debt exchange (JDX), say stakeholders.

“The yields are tightening and this is a positive sign for Jamaica in terms of pricing,” Pamella McLaren, senior director in the Debt Management Unit in the finance ministry stated. She added that a lower yield positively impacts the equity positions of financial institutions who purchased these bonds at lower prices. The lower the bond yield the higher its price due to the inverse correlation.

The average yields on US dollar denominated bonds dipped to 7.89 per cent on March 11 from 11.26 in December according to the Ministry of Finance. Yields averaged 10.6 per cent at the end of January. Similarly, yields on the Euro denominated bonds have declined to 8.14 per cent from 11.84 per cent in January.

Charles Ross principal of Sterling Asset Management told the Business Observer that financial institutions are benefiting from the reduced yields.

“The bond prices are now priced higher than when they were purchased and it will have a positive effect on the balance sheet particularly the equity position of local institutions,” Ross explained. “…It will benefit the equity position of institutions. So declining yields certainly have positive effect on financial institutions.”

Financial analyst Dennis Chung in an written response to Business Observer queries stated that the rating agency upgrades positively affected the bond market.

“Yes. I think that both events would have affected it,” he stated.

McLaren said that prior to the debt exchange there was a lull in the bond market but with the “new benchmark bond now trading above par”, it reflected “confidence in the market and that the instrument being held by investors has not lost value”.

“Before the JDX there was 350 illiquid GOJ bonds and post JDX there are now 25 liquid benchmark bonds. This is one of the pluses of the JDX that it has brought liquidity to the bond market which makes the bonds more tradable,”

she added.

Darlene Morrision, deputy financial secretary in the finance ministry, stated: “Most of the global bonds were also trading above par. This is an indication of market sentiment toward Jamaica credit.”

In mid February, Fitch upgraded Jamaica’s long-term foreign and local currency ratings to “B-” from “CCC” and “C” respectively, with a stable outlook. S&P followed a week later, hiking its long-term foreign and local currency sovereign credit rating on Jamaica to “B-” from “SD” or “Selective Default” with a stable outlook. Then in March, Moody’s upgraded Jamaica’s local and foreign currency bond ratings to B3 from Caa1 on foreign currency and Caa2 on local currency, which it said reflected “diminished credit risks following the domestic debt exchange completed in February”.

“The new ratings take into account a significant improvement in the Government’s liquidity position due to lower debt-servicing costs and substantial multilateral inflows while acknowledging medium-term credit vulnerabilities due to a debt burden that remains very high,” said Moody’s Alessandra Alecci, senior analyst for Jamaica. “Despite the difficult fiscal adjustment required to access multilateral funding, the population has broadly supported the Government’s macroeconomic programme.”

Over the past month, Minister of Finance Audley Shaw has inked a total of US$800 million ($71.6 billion) worth of multilateral loans at interest rates ranging between 0.63 per cent and 1.23 per cent — World Bank US$200 million at 0.63 per cent per annum and The Inter-American Development Bank (IDB) at US$600 million at some 1.23 per cent per annum.

Jamaica had executed a voluntary debt swap, reached as a conditionality of the US$1.2 billion stand-by arrangement with the International Monetary Fund (IMF) last month. The debt swap registered a participation rate of more than 99 per cent and will result in Government saving some $40 billion on interest cost payments in its first year — due to a reduction in interest rates and extension of debt maturities.