THE MINISTRY of Finance appears set to issue a new tax free index linked US dollar bond it emerged yesterday.
Primary dealers were yesterday being canvassed on the move which is designed to help ease the pressure on the local currency that has developed since the Ministry went to the international capital markets in August and raised US$225 million on a bond yielding 13.125 per cent.
Traders said yesterday they had received an "indicative term" sheet testing the market reaction to an instrument that would be converted at the average weighted exchange rate plus 1.005 per cent.
They estimated local players would demand an initial interest coupon of between 11.75 and 12 per cent in order to buy the tax free bond, which would be slightly more than the 11.25 per cent issue by Citbank earlier in the year.
It was unclear just how much the Ministry planned to raise or for how long but traders estimated that US$50 million for somewhere between one year and 18 months would probably encourage investors to buy the new instrument.
Investors will be able to pay for the bonds in Jamaican currency at the prevailing exchange rate and are shielded if they hang onto the bonds by Government's pledge to repay in local currency at the prevailing exchange rate when they become due.
The news comes just two days after the Bank of Jamaica (BoJ) withdrew its one year and 270-day reverse repurchase instruments that had pushed local interest rates up by as much as four per cent in a bid to stem increasing pressure on the local currency.
The local currency yesterday closed at 44.60 against the US dollar. This new bond is designed to reduce pressure on the currency by offering investors a 17 per cent effective yield in local currency.
The benchmark 30-day reverse repurchase rate (Repo), the primary rate at which it sells instruments to dealers and uses as a signal rate for commercial banking rates, has remained unchanged. However, short term money from dealers is being priced at a rate of between 18 to 19 per cent.
Three weeks ago the BoJ introduced what it described as a temporary measure. The rate of the 270-day Repo jumped from 17.65 per cent to 20 per cent, while the rate on the longer 365-day instrument moved from 18 per cent to 24 per cent.
Several investment dealers were irate at the move, which came a day after the latest Local Registered Stock (LRS) issue. Many had locked clients into less attractive deals and longer term debt instruments yielding less than 19 per cent the day before.
