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During the year 2003, the Central Bank reduced its Open Market rates by 150 basis points (1.5%) on two occasions. The first cut was in January and the second in May.

That pushed the entire yield curve down, increasing the value of bonds in the hands of investors. During the period the yield curve moved down sharply. For example, the bond maturing at January 1, 2008, which was approximately traded at 10.5% in early January, is now trading at around 9.0%. Therefore, during the period the value of the same bond has increased by approximately Rs. 5.00. The rise in value of the bonds due to decline in yields-also known as capital gains, are exempted from taxes in the hands of the investors.

The First Capital Sovereign Bond Index (FBI) shows a Total Return of 23% (annualised) for the period ended May 9, 2003. During the year 2002 the FBI gained by 22%. FBI tracks the movement of the value of the bonds on a daily basis. At present FBI tracks 60 maturities, which are maturing after a year and before six years. With the Central Bank issuing more longer-term bonds (4,5 and 6 Year Maturities) in the recent past, the duration of the index has been improving. The present duration of the index portfolio stands at 2.4 years. The market capitalisation of the index also had grown and now it stands at approximately Rs.203 Billion, which is more than 50% of the total bonds outstanding as at today.

Based on the performance of the index, it is reasonable to assume that the large players of the bond market would have reaped very high dividends during the first half of the year. Primary dealers, Commercial Banks, Provident Funds, Insurance Companies and other large Financial Institutions are the main players.

According to the FBI, any portfolio with a higher duration should have made a higher return for the same period and vice versa. Further, the leverage funds would have made a much higher return on investment on the back of the increased capital gain opportunities. (Source: First Capital)

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