The Bank of Jamaica - File

With Jamaican bonds already under pressure from the global credit crisis, fears that they may also be target of speculators were among the reasons for Wednesday's central bank decision to open a special lending window to local financial institutions needing cash to buy-back instruments from foreign holders, analysts suggested yesterday.

"I think they are responding to speculative attacks," said one senior broker yesterday, whose firm is a significant player in the bond market. He asked for anonymity because of the sensitivity of the issue.

In Wednesday"s announcement, the Bank of Jamaica (BOJ) did not say how much cash it was willing to put on the line and neither did it outline the conditions for its advances.

But the central bank stressed that the facility was "strictly intended to provide liquidity to these institutions for overseas margin and repo payments on GOJ (Government of Jamaica) global bonds during this period of dysfunctional money markets".

Among its objectives, the central bank said, was to "ensure the stability of GOJ global bond prices".

Tree fall

These have been in free fall in recent weeks, evidenced particularly by a February, 2009 instrument, with a coupon of 10.5 per cent.

"Just weeks ago, the yield on that bond, now trading at around 99, was between seven and eight per cent," one analyst told the Financial Gleaner. "Now, it is is the range of 10 to 11 per cent."

Not so long ago, too, a government instrument that matures in 2011, with a coupon of 11.75 per cent, was at an ask of 117.5. Its ask is now, hovering at 110.

"I wouldn't say that the market has been in a free fall, but there has been a sharp decline in values," the senior broker said.

Part of the reason analysts say, is just that fearful investors, pummelled by sub-prime triggered battering of global bourses have been in a scramble for perceived safe ground. Many are fleeing emerging markets, even some, like Jamaica, with a very healthy reputation for meeting their debt obligations.

"Most of the overseas brokers would have been getting jittery in terms of the credit hassle," said Nigel Sinclair, research analyst at Guardian Asset Management.

"So, most of them would probably want to reduce their exposure to (quote, unquote) critical assets like emerging markets," Sinclair said.

Charles Ross, the managing director of Sterling Asset Management, a financial trading house, agreed.

"People are trying to move out of risky investments into safer investments," said Ross.

The upshot, as noted by Ross: "The interest rates on most bond prices have fallen."

Rates plummet

Indeed, rates on US government bonds have fallen to near historic lows, at 4.09 per cent yield on the 30-year bond at October 6, but was back up to 4.22 per cent yesterday.

The three-month Treasury bill, referred to as the "ultimate in safe assets", sank to 0.2 per cent yield.

Yields may not be great, but with the beating investors have taken on global equities and with the fear hanging over financial markets, they are perceived, at least, to be safe.

"We have the unfortunate situation where government of Jamaica's credit rating... is a single B," explained Christopher Chin-Loy, assistant vice-president at Scotia DBG, the investment banking arm of Bank of Nova Scotia Jamaica.

"So, what you are going to find is that if anyone is going to sell off bonds, they are going to sell the bonds that have lower credit ratings," Chin-Loy said.

But there is still the issue of speculation, or the fear of it, as it relates to Jamaica.

When the credit crisis accelerated last month with the collapse of some of the most iconic names on Wall Street and American banking generally, regulators here said that the exposure by Jamaican firms was limited. Banks and brokerage houses made the same point.

Most did not have have direct exposure to any of the most troubled firms, such as the collapsed Lehman Brothers or Merrill Lynch, which courted a buyer, preventing a tumble. And insofar as they faced exposure on foreign markets, it was through their holding of Jamaica government bonds, which they deemed to be secure.

Two factors, though, arise. One is that a decline a steep decline in the price of bonds could effect of the asset values of firms, making the smaller brokerage houses vulnerable. The second is that some institutions pledged their Jamaican government bonds against purchase loans from foreign brokers.