The end of the Jamaica bid (for now)
The recent collapse of the near 22-year-old support for the Jamaican yield curve from Jamaican buyers, or the so called "Jamaica bid", is worthy of a detailed overview on its own. The timeline really begins with the Bank of Jamaica (BOJ) beginning its interest rate tightening cycle in the second half of last year, but it dramatically accelerated when the Bank of Jamaica began to sharply tighten liquidity at the beginning of this year. The impact of this sharp tightening of local liquidity was, however, somewhat cushioned initially from a Jamaica bid standpoint anyway, by the repayment of the 2022 Government of Jamaica US dollar Eurobonds at the beginning of this year. Those bonds, because of their special tax-free nature for local institutions, had been moved almost entirely into Jamaican hands (they also usually had a premium to the rest of the curve), and were now very short, so therefore, at least some US dollar Eurobonds would have been purchased to replace them on the balance sheets of local banks and securities dealers. These purchases would also have happened shortly before the Fed liftoff, and therefore before the liftoff impact became fully apparent, at least to local players.
Following the Fed liftoff, it became clear to all local players, if it wasn’t before, that the Fed was on a major tightening cycle. While Kingston’s “Wall Street”, or Knutsford Boulevard, may not be as sophisticated as its US counterparts, Jamaica has long had a fixed income culture, and most asset managers in senior roles grew up as bond traders to varying degrees. They watch Bloomberg and CNBC too, and realized that buying bonds now was a good way to lose money with the Fed raising rates, as Jamaica would not be immune to the global context. Unsurprisingly, as a result, the Jamaica bid has been absent for several months now, and is unlikely to return in the near term, particularly as the Fed continues to tighten.
The dramatic recent fall in Jamaican bond prices is in no sense unique in emerging markets. Simply put, there is not enough international demand to maintain the previous tight spreads, relative to our rating, that Jamaica has benefitted from for a long time. It is important to stress, however, that the fundamentals here are still strong, as Jamaica is still a good credit, with no discernible change in its ability/capacity/willingness to service its debt. The technicals, however, have changed.
Now read on...
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