Barclays Recommends Sri Lanka’s Debt over Vietnamese Dollar Bonds with Sri Lanka's Improving Rating & Economy

17th December 2010, www.bloomberg.com

Investors should sell Vietnam’s 10- year dollar bonds and buy Sri Lankan debt after Moody’s Investors Service cut the Southeast Asian nation’s credit rating, according to Barclays Plc.

Moody’s lowered Vietnam’s long-term foreign-currency rating to B1, four levels below investment grade, from Ba3 on Dec. 15. The ratings company cited the risk of a balance of payments crisis, a drop in foreign reserves, quickening inflation and the weakening dong for the assessment. Concern about what policy directives the ruling Communist Party will take at its 11th National Congress next month also reduces the debt’s appeal, Barclays analysts wrote in a research report today.

“We believe there should be more clarity on the policy direction for growth, inflation and the currency when the National Congress has completed,” according to the report headed by Singapore-based economist Prakriti Sofat.

Barclays is recommending Sri Lanka’s debt because it says the country’s rating may be upgraded due to improvements in the budget and the balance of payments. The nation is rated B1 by Moody’s and that may be raised by one level next year, a separate Barclays report said last week.

“We remain constructive on the Sri Lankan sovereign given its gradually improving budget position, upbeat growth outlook, robust balance of payments and rising foreign-currency reserves,” Sofat wrote.

Yield Premiums
The yield on Vietnam’s 6.75 percent dollar-denominated note due January 2020 has climbed 21 basis points since the Moody’s announcement to 6.31 percent as of 1:35 p.m. in Hanoi, according to prices from the Royal Bank of Scotland Group. That’s the highest level since July. The yield on Sri Lanka’s 6.25 percent U.S. currency bond due October 2020 has advanced 14 basis points in the same period to 6.25 percent, RBS prices show.

The extra yield investors demand to hold Vietnam’s debt over U.S. Treasuries widened 38 basis points to 279 yesterday, according to JPMorgan Chase & Co.’s EMBI Global Diversified Sovereign Spread Index. For Sri Lanka, the premium climbed 13 basis points to 260, near a record low of 247 reached on Dec. 15.

The cost of protecting Vietnam’s sovereign bonds from default for five years has increased 24 basis points this week to 286, according to CMA prices.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

Related Info:
Moody's Gives Sri Lanka B1 Sovereign Rating with a Stable Outlook

Sri Lanka $1bn Bond Issue Closes in 14 Hours Attracting $6.3bn Bids

Sovereign Bond Investors Should Turn to Sri Lanka over Vietnam Says Nomura