TODAY we re-cap the major movements in our macro-economic landscape in 2013. We will segment our analysis between the fixed income market, primary debt market and a review of interest rate movements.

Fixed income market/interest rates and low secondary market activity in Government of Jamaica (GOJ) instruments prevailed throughout 2013 as investors continued to avoid GOJ risk. With the collapse of the 2010 IMF deal, ballooning government debt, weakening economic and fiscal performance, depleting Net International Reserves (NIR) and accelerating devaluation of the Jamaican dollar (JMD), the GOJ once again sought the assistance of the International Monetary Fund (IMF) and other multilateral agencies. The GOJ hoped that these institutions would provide budgetary support, restore confidence in the economy and boost NIR levels. However, in order to conclude a deal with the IMF, the GOJ was forced to execute its second domestic debt exchange (NDX) within 3 years and swapped existing domestic bonds for longer maturities and lower coupon rates to avoid total default and savings from interest costs. The execution of the debt exchange was a huge set-back for investors in terms of realised losses, lower income and lack of liquidity – as bonds maturing in 2013 were extended for at least another year.

Depleting NIR levels, partly a result of the Bank of Jamaica’s (BOJ) efforts to contain the slide of the JMD, also added to market concerns. JMD liquidity and USD liquidity were relatively low in 2013 and created upward and sustained pressure on interest rates and exchange rates. 30-day JMD repo rates, for instance, which were around six per cent immediately following the NDX in February rose above nine per cent a year, while quotes for the 90-day and 180-day periods were in excess of 9.5 per cent. However, given the absence of secondary market activity in GOJ bonds, there was no significant deviation in yields on long- term instruments post-NDX and so two-year to 30-year GOJ instruments continue to offer yields within the range of 7.50 per cent to 12 per

cent, respectively.

Primary market activity

With the exception of its monthly offers of Treasury Bills through the BOJ, the ministry of Finance (MOF) was absent from the domestic capital market post NDX as the government strived to reduce its debt load. In 2012, on average the MOF issued three instruments per month and raised approximately $7 billion on average from its monthly offer of bonds. However, with the absence of GOJ in the market and the ongoing devaluation of the Jamaican dollar, BOJ regularly sold variable rate instruments, through commercial banks and primary dealers, to regulate the flow of JMD liquidity. The variable rate instruments predominantly had quarterly coupon resets, ranged in tenors from six months up to two years and initial coupon rates ranging from 6.77 per cent to 7.65 per cent. Notwithstanding, BOJ continued to offer its 30-day instrument to manage daily JMD liquidity and kept the rate at 5.75 per cent since February after reducing the previous rate by 50bps immediately following NDX. BOJ occasionally also sold USD and USD-linked instruments in the market. There was also a plethora of corporate issuances in the market as corporate borrowers sought to capitalise on reduced interest rates immediately following NDX and increasing investor demand for non-GOJ investment options.

Treasury bill yields

Yields on GOJ Treasury bills (T-bills) declined immediately after NDX in February but steadily increased thereafter and eventually surpassed pre-NDX levels. 30-day T-bill rates started 2013 at 6.31 per cent, dipped to a low of 5.25 per cent in February, peaked at 6.37 per cent in August and ended the year at 6.25 per cent . This represented an overall decline of six basis points (bps). The 90-day T-bill rate started the year at 7.67 per cent fell to 5.50 per cent in February and then steadily increased over the ensuing months rising, as high as 7.57 per cent in November and then falling to 7.53 per cent at year end for a full year decline 14bps. The 180-day T-bill rate, however, reflected an increase over the year, commencing 2013 at 7.18 per cent, dropping to 5.75 per cent in February and then increasing to 8.25 per cent by year end, recording a 107-bps increase year over year.

Tune in next week for an overview of the foreign exchange market, inflation and other key monetary policy movements.

Eugene Stanley is the Vice President of Securities and Foreign Exchange Trading at Sterling Asset Management. Sterling provides advisory and financial services 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