By Lavern Clarke, Staff ReporterANOTHER VARIABLE rate debt instrument hits the market on Thursday, the Finance Ministry announced on the weekend, its second in two weeks as Government moves to tame interest rates.
The investment bond has been offered for sale at a fixed 26.31 per cent which is the prevailing treasury bill rate for the first six months of the bond's 41-month life, following which interest will be repayable quarterly at the weighted average treasury bill yield or WATBY plus 1.5 per cent.
The offer closes August 18.
The terms are similar to the July variable bond, except that the fixed portion was set then at 28.5 per cent in line with the prevailing T-bill rate, and the tenor was 43 months. That bond raised $4.47 billion for the treasury which fell below yields of the fixed instruments preceding it.
Since April, the start of the fiscal year, Government has placed six instruments publicly, two of which were a mix of variable and fixed rates, to raise funds to finance "budgetary requirements" - largely debt servicing. The monthly issues of treasury bills and local registered stock takes the number of public offers to at least 13.
SIGNAL RATES
The placements have been carefully timed with the central bank's own open market instruments often used as signal rates to channel the market towards accepting lower premiums on new Government debt.
Interest rates have been trending down on a two to three week cycle.
Market analysts say the switch to variable rate instruments in an environment of declining rates will suit the Government as it moves to reduce the cost of debt servicing on the treasury, and to bring rates more in line with the 19 per cent on which the budget is crafted, but that the offers will become less attractive to investors.
FLEXIBILITY
"Variable rate instruments in a declining interest rate environment will not do well," says Claudette Crooks, vice-president of Guardian Asset Management, speaking with Wednesday Business ahead of notice the latest instrument's in a previous interview. Mark Walters of Dehring Bunting and Golding Walters says the market is now looking to go long and lock in funds to protect against the falling rates, but adds that there are investors who think it prudent to mix their portfolios by adding variable rate instruments.
"It offers the flexibility that if rates move back up, they will have instruments in their portfolio that will move up with the rates."
The drop in interest rates which peaked at 36 per cent in April, coupled with a stabilised foreign exchange market and reported GDP growth in the past two quarters, have seen investors moving more into equities, especially with several companies seemingly doing well based on their quarterly results.
"Confidence is returning to the economy and investors are positioning themselves in the equities market," said Walters, DB&G's vice-president of treasury operations.
On Monday, the broad JSE index increased by more than a thousand points, a near two per cent growth, to reach a new high of 55,728 points, and climbed an additional 120 points in Tuesday's trading for an all time high of 55,846 points.
REGIONAL COMPANIES
DB&G's analysis of the market shows that the broad index has climbed chiefly on the performance of regional companies with subsidiary operations in Jamaica, Guardian Holdings Limited, RBTT Financial Holdings, Trinidad Cement Limited and First Caribbean International Bank, which posted gains on their stocks ranging from 12-30 per cent for the first half of calendar 2003.
Between January and July, the JSE Index grew 19 per cent, said Walters, while the All-Jamaican composite grew 9 per cent in the same period with strong showings in the period June-July from companies like Bank of Nova Scotia, National Commercial Bank, Caribbean Cement, Jamaica Producers, Grace, Kennedy, and Capital and Credit Merchant Bank.
Noting that several listed companies appear poised to beat market expectations when the quarterly results are published, Walters advises that:
"Fund managers who have recently confined themselves to the bond market, must now take a new look at their equities holdings with a view to increase the presence in their portfolios."
