The Government of Jamaica (GOJ) recently reopened the 2019 Global bonds and secured additional funding of USD$400mm. This USD$400mm will be used to redeem the GOJ Bond maturing May 11, 2011. Additionally the 2011 Jamaica Debt Exchange (JDX) Benchmark Index Notes maturing February 24, 2011 were redeemed in full. This resulted in a sizable increase in Jamaican dollar liquidity in recent weeks. The Government also announced the cancellation of new debt issues scheduled for November 12, 2010 to March 2011. According to the GOJ’s press release, the decision formed part of a strategy of “Prudent Debt Management” and the Government’s aim to maintain sustainable debt levels. Immediately thereafter, the Bank of Jamaica announced a 50 basis point reduction in the interest rate payable on Bankof Jamaica 30-day Certificates of Deposit to 6.75 per cent(Effective Wednesday 23 February 2011).This revision to the Bank’s policy rate signals a decline in inflation in accordance with IMF programme projections for the fiscal year 2011/12.

Weaker than anticipated local domestic demand has kept inflation low despite the high levels of Jamaican dollar liquidity in the money market. However, the intrinsic market sentiment is one of cautious optimism as the BOJ’s foreign reserves remain strong, bolstered by the proceeds of the reopened issues. The Treasury Bill auction held on February 23, 2011 yielded 6.7567 per cent, 6.65991per cent, 6.62360 per cent per annum on 30, 90 and 180 tenors respectively. These results are interesting because they indicate that investors expect interest rates to continue to fall in the medium to short term and therefore they are willing to accept lower yields on their long term investments. Investment rates are the lowest in 40 years. Please note, that I have intentionally made a distinction between investment rates and borrowing rates because the latter are still in the mid teens. The challenge for the Government and Bank of Jamaica continues to be inducing a reduction in the borrowing rates to facilitate increased economic activity.

Investors are now in a quandary -wheredo attractive investment opportunities lie?What are the risks and the benefits?

The logic behind the trade Idea

Currently you can purchase Government of Jamaica 2019 JMD Benchmark Index notes at a 8.7 per cent p.a. yield to maturity. At the time of writing this article one could also purchase GOJ Global (USD) bonds 2019 to yield 7.54 per cent p.a. yield to maturity. In other words, investors are receiving a 1.2 per cent premium for investing in local Jamaican dollar denominated debt instruments vs GOJ USD denominated debt. Based on the decline in interest rates that has taken place in the local market, and the market expectation that this is likely to continue, we expect the price to increase on GOJ global USD bonds (and a decline in their yields). Alternatively, an increase in interest rates on Jamaican dollars would have the opposite effect – the ultimate result being an increase in yields on GOJ local JMD bonds and a continued appreciation in the value of the Jamaican dollar.

It’s critical to position yourself to take advantage of the changing market conditions. Contact a financial advisor to explain what the changes in the interest rate and macroeconomic environment mean for you.

Dave Cameron is the Manager of Fixed Income and Securities Trading at Sterling Asset Management. Sterling provides medium to long term financial advice and instruments in U.S. and other world market currencies to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm