The Government of Jamaica accelerated borrowing from the local market starting in the pandemic year 2020. Compared to five issues offered in 2019, bond offers doubled to 10 in 2020 followed by 18 offers in 2021, some of which were reopenings.

Year-to-date January to October 2022, there have been nine offers. As the offers increased, however, public take-up has declined somewhat, with the central bank noting the contraction in appetite in 2022, before which time offers experienced full take-up.

In May 2022, the public responded to an offer of $2 billion with take-up of $1.8 billion. In August, an amount of $4.4 billion out of an offer of $6 billion was taken up.

And in October, in response to an offer of $6 billion, $3.1 billion was taken up.

Kerice Gray, senior trader with VM Wealth, commented, “The appetite for auction securities has declined since the debt management unit implemented an undisclosed ceiling for each auction.

“Investors are able to get attractive interest rates on shorter investments such as money market placements and treasury bills. The issues that have been coming to the market have been mainly fixed rate securities. In an environment where interest rates are increasing, fixed rate bonds tend to be relatively less attractive.”

Gray noted, “Since September 2021 the BOJ has increased interest rates 10 times. As a result, we have seen where investors are preferring to stay liquid or buy shorter-term securities, such as treasury bills.

Uncertainty

Herbert Hall, founder and chief investment banking consultant with Ambassador Capital Partners Limited, told the Jamaica Observer, “The major purchasers of GOJ bonds are normally the institutional investors such as pension funds and brokers.”

“A few likely reasons for them to be purchasing less are: the high inflationary environment which is causing uncertainty in the market as it relates to interest rates. So if they purchase bonds at a particular interest rate and then the market rates increase, it means that the yields on the bonds that they purchase would have to increase, implying that the price of the bonds will fall; hence, they will have to take a mark-to-market hit as the dollar value of the bonds would fall.”

Mark-to-market losses can occur when financial instruments held are valued at the current market value. If a security was purchased at a certain price and the market price later fell, the holder would have an unrealised loss, and marking the security down to the new market price would result in the mark-to-market loss.

Hall stated, “When there is uncertainty in the market, it increases risk and as such investors are (a) likely to prefer shorter tenured assets vs long dated ones and (b) would want to stay more liquid so that they are better able to absorb any eventualities or take advantage of any other opportunities.

The analyst noted, “There may be other more attractively priced assets in the market such as USD/USD indexed corporate bonds”

Hall, who recently left NCB Capital Markets to form Ambassador Capital Partners Limited (ACPL), has over 20 years experience in the finance field.

The investment banker has been responsible for some of the Caribbean’s largest debt raises as well as initial public offerings with his new company specialising in debt refinancing, debt restructuring, capital raises (debt, quasi equity and equity), mergers and acquisitions as well as off balance sheet financing.

Currently he said, “The most interesting bond market trends would be shorter duration bonds between three years and five years with most preferring three years and assets being denominated in USD or being USD Indexed to protect against inflationary pressures.”

Outlook

Ryan Strachan, vice-president for investor relations at GK Capital Management Limited, commented, “The consistent generators of JMD cash, namely insurance companies and pension funds would be the dominant buyers of JMD bonds locally.

“In terms of trends, I believe that JMD bond should bear more appeal given the strong economic trends, stable FX rate and inflation that appears to be moderating. We are also seeing a few issues coming to market bearing double-digit yields at a fair spread relative to the inflation rate that warrant due consideration.”