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Maturity mismatch seen in Sri Lanka bond market

ECNOMYNEXT – Money market funds in Sri Lanka have grown rapidly in recent years but still have high growth potential with a shortage of long term bonds creating a maturity mismatch, a Fitch Rating analyst said.

The average duration of global investment grade bonds fluctuate between five years to seven years, said Li Huang, Associate Director, Fund and Asset Manager Ratings of Fitch Ratings.

“In contrast in Sri Lanka bond funds tend to have more short term duration,” she told a forum organised by the rating agency.

“Currently there’s a shortage in Sri Lanka of the supply of long term bonds which leads to a maturity mismatch between the longer duration of the fund liability side and shorter duration of the fund assets side.”

According to the experience in developed markets, the demand for long term savings products like life insurance and pension funds could trigger the development of the issuance of long term bonds, she said.

In Europe, three-quarters of the bond assets are held by institutional investors with over 70 percent of them being insurance companies and pension funds.

Money market funds globally have been shrinking while in emerging markets especially in China money market funds have seen substantial growth, Li said. 

“Sri Lanka’s market has increased – more than tripled in the last three years from 31 billion rupees to 126 billion rupees,” she said.

Bond market funds have been increasing at a comparative pace with the growth of bond funds surging almost seven times in three years.

“When you look at money market fund utilisation in Sri Lanka compared with other markets we can see that there’s high potential for short term capital market and money market funds in Sri Lanka to grow,” Li said.





“Money market fund assets account for less than two percent of the broad money supply which is much lower than in other markets. In the US market for instance the ratio is over 20 percent.”

Li said money market funds could be the first step in the development of the mutual fund industry.

“Although it is not universally true, normally money market funds are always the first step to move capital out of bank accounts into investment vehicles.” 
 (Colombo/September 18 2015)

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