Why investors held on to their GOJ bonds

The Government of Jamaica (GOJ) launched an invitation for bondholders of the notes due in 2028, 2036 and 2039 to exchange their notes for cash as the country restructures its debt profile. The offer targeted the purchase of the fixed-rate 2028s at 102.625 against an outstanding volume of US$1.25 billion, the fixed-rate 2036s at 117 against US$250 million, and the fixed-rate 2039s at 118 against US$1.24 billion. In total, the tender targeted US$2.74 billion across all three notes, but saw a take-up of only US$476 million, a participation rate of 17 per cent.

Of the volume tendered, the vast majority came from the 2028 bonds, which accounted for US$343 million. This was expected, given the structure of the bonds and their proximity to maturity. The JAMAN 6.75 per cent 2028s have an amortising sinking fund feature, having already returned 33.33 per cent of principal in April of this year, with another 33.33 per cent due in April 2027 and the final payout at maturity in 2028. At the tender price, the bonds were yielding 4.34 per cent, which could give investors an opportunity to position in a better-yielding asset. Conversely, the JAMAN 8.5 per cent 2036s are deeply illiquid, rarely trade on the secondary market, and fall well below the typical US$500-million benchmark threshold for institutional liquidity.

Investors choosing to hold these bonds are not simply signalling an expectation of lower interest rates. Other factors are at play, such as reinvestment risk and the avoidance of realised capital losses. In the post-COVID period, the JAMAN 39s traded well north of 140. While the Government’s buyback price of 118 was priced within the current secondary market context, tendering would force many institutional holders to crystallise massive balance sheet losses on legacy blocks acquired at much higher levels. Even when accounting under amortised cost, the hit to earnings and capital reserves would simply be too steep.

Furthermore, these long-dated global bonds serve as essential collateral for local and regional institutions to fund day-to-day operations and repo lines. For long-term buy-and-hold investors whose primary mandate is securing reliable, high-yielding income through to 2039, trading out of that cash flow for the replacement 2037 paper means shortening duration by two years and taking on reinvestment risk.

From the Government’s perspective, it successfully issued a new bond of US$1 billion and deployed US$476 million towards the buyback, with more than US$300 million of that absorbed by the shortest-dated tendered note and the balance left in the coffers.

Kerice Gray is manager of the Global Markets and Digital Asset Trading Department at VM Wealth Management.