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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » New indices to track govt. securities

New indices to track govt. securities

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1New indices to track govt. securities Empty New indices to track govt. securities Wed Dec 05, 2012 11:26 am

K.Haputantri

K.Haputantri
Co-Admin
New indices to track govt. securities
December 4, 2012, 7:36 pm

The Island

By Mario Andree

NDB Capital Holdings, the holding company of investment banking cluster of the National Development Bank, together with India’s largest independent and integrated research house CRISIL launched a range of fixed income indices to monitor government bills and bonds.

The new set of indices co-branded using both companies NDBIB-CRISIL will cover two sets of Treasury bills (91 days and 364 days) and bonds (3 years and 5 years).

According to NDB Bank Chairman Hemaka Amarasuriya, the government securities market has emerged as the largest and the most liquid market for fixed income securities in the country with total treasuries issued amounting RS. 3.2trillion.

He said the government has given special emphasis to develop the country’s debt market through the 2013 budget, and to strengthen the government initiatives the new indices would attract more investments and create index based gilt funds.

With the government allowing foreign participants in rupee denominated Treasury securities, there has been a significant demand from foreign investors for securities and increasing the need for measurement mechanisms of performance of government securities, he said.

NDB hopes to expand the indices to monitor the corporate bond market in the near future and said this was the first step towards developing a more comprehensive set of indices to promote a vibrant corporate debt market.

"Apart from representing the performances of risk-free benchmark securities, the indices will help carry out the performance evaluation of funds with a fixed income orientation. They would also provide value in terms of being indicators of the aggregate performance of the government securities market in the country."

NDB Capital Holdings CEO Vajira Kulatilaka said indices were a fundamental need of well functioning markets.

According to him the new indices introduced by NDB and CRISIL would assist investors, analysts, debt issuers and economists to keep track and evaluate government securities.

CRISIL President Mukesh Agarawal said, "We believe that the launch of these indices will support the development of the Sri Lankan debt market by providing investors with a credible and independent measure of the risk-return characteristics of government securities with the initiative to make markets function better."

"The indices can be used to launch passive exchange traded funds or to develop derivative products. They will be total return indices, which captures the price of the bond and interest accrual."

According to the Central Bank the increase in policy interest rates, the higher borrowing requirement of the government, and tight liquidity conditions pushed yields on government securities upwards in both the primary and the secondary markets until end August 2012.

"Yield rates on government securities in the primary market remained broadly stable during January but recorded a mixed performance thereafter. Yields on Treasury bills across all maturities increased continuously from February up to mid-May 2012 due to the shortage of liquidity in the money market. However, yields on Treasury bills pertaining to all maturities remained broadly stable throughout July and August 2012 and declined from mid-September 2012 reflecting lower borrowings by the government. The yield rates on 91-day, 182-day and 364-day Treasury bills have increased by 262 basis points, 386 basis points and 371 basis points, respectively, from end 2011 to 11.30 per cent, 12.57 per cent and 13.02 per cent, respectively, by end September 2012.

"The primary market yields on Treasury bonds, which were in the range of 9.45 per cent to 14.75 per cent in 2012 for the short end (2 year maturity) and the longer end (9 years and 6 months maturity) remained high compared to 7.77 per cent to 9.30 per cent for the short end and long end, respectively, in 2011 due to the high borrowing requirement of the government and market anticipation of higher interest rates.

"Treasury bonds including new issues and reissues in the primary market during the first nine months of 2012 amounted to Rs. 767.5 billion (face value), which marked a significant shift from short to longer term maturities resulting in an improvement in the maturity profile, and was supported by increased appetite of foreign investors for Treasury bonds. Foreign investment in Treasury bonds increased remarkably to around Rs. 96.2 billion during the first nine months of 2012 compared to the Rs.12.1 billion recorded during the corresponding period of 2011.

"The secondary market yield curve for government securities during the first nine months of 2012 shifted upwards mainly due to the comparatively high yield rates for government securities in the primary market and changing market expectations during this period. Transaction volumes in Treasury bonds on outright basis declined to Rs. 390.2 billion by end September 2012 from Rs. 471.3billion during the corresponding period of 2011 mainly due to higher yields on Treasury bills. Nevertheless, transaction volumes of Treasury bills in the secondary market on outright basis during the first nine months of 2012 increased significantly to Rs. 819 billion compared to Rs. 465.1 billion recorded during the same period of 2011," the Central Bank said.

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