By Errol Gregory,
Contributor
IN an obvious bid to gauge investors' response and restore some lost ground in a market that has witnessed a number of temporary shifts in policy, BoJ has put a new instrument on the market.
The new index linked bond that's tied to a specified rate of exchange (the 10-day BoJ moving average selling rate multiplied by a factor of 1.005) has a coupon rate of 11.125 per cent interest will be paid on a quarterly basis in Jamaican dollars and the instrument is tax free.
On the face of it, this new instrument is a carefully thought out move by the monetary authorities. This is obvious given the context in which this instrument is put on the market. Only two weeks ago BoJ left many investors and investment advisors nursing their wounds as the Central Bank, having put its medium term LRS offers on the market at an average 1.8 per cent rate, some hours later increased its 9 month and 1 year repo rate to 20 per cent and 22 per cent respectively. Many dealers who had gone ahead and repriced their LRS instruments at lower prices on the secondary market beat upon themselves when they considered the higher yields they could make had they got an inkling that rates would have moved up.
BoJ has since pulled rates down to 18 per cent and has paid down amounts totalling $1 billion dollars rather than allow investors to roll over their instruments at higher yields. But the memories are obviously fresh in investors' minds as well as dealers organising trades in these securities.
It is this situation of lost confidence and apparently unpredictable policies that BoJ's latest instrument is designed to correct. In this regard it has good chances of success. For one thing, the authorities have gone for marketable features for the instrument, namely frequent interest payments and tax free status.
Additionally, an indexed bond is likely to sit well with investors in an environment where there is a strong perception that inflation is being tightly controlled. Thirdly, the timing of the issue is propitious as the authorities have facilitated a positive liquidity environment that should bode for success. This is so as the Central Bank has paid down $1 billion in T'Bills - a point raised above. Additionally only recently approximately 300 million of LRS coupons payments were injected into the system. On top of this a further $60 million in LRS coupon payments entered the system this week. The market definitely has surplus funds looking for a home.
But despite all these favourable factors the outlook for the indexed bond's success remains uncertain. In the first place many fund managers view the yield as too low and are not pushing the instrument aggressively. "Even if you gross up the earnings (Drop the tax free assumption) the earnings are still less than the 18 per cent available on government short term Paper," said one fund manager. Another fund manager said that she thought the bond was attractive for institutional investors who have not exceeded the proportion of their portfolio earmarked for these investments.
In the case of individual investors she argued that they faced anxieties relating to any further appreciation of the currency and the fact that the instrument was rewarded at the 10-day moving rate that was lower than the competitive cambio rate.
A third point that should not be missed is that some local investment houses are already offering attractive returns on their US-denominated securities. Take the case of Jamaica Money Market Brokers it offers attractive 10.65 per cent yields on amounts exceeding US$10,000 held for a year or less. Investment houses have definitely adopted an aggressive posture in attracting US accounts and these instruments carry no foreign exchange conversion risk.
BoJ's latest US Indexed Bond definitely represents strategic thinking by the monetary authorities. Their efforts will only be rewarded however if there is a buy in by investors. This is the real opportunity cost when there are radical shifts in policy - even if only temporary.
