CSE Fixed Income Analyst

Step 2: Yield Curve Analysis

Shape Interpretation

• Normal (upward sloping): Economy growing normally, longer maturities pay more
• Flat: Economic uncertainty, rate change expected
• Inverted: Recession signal — short rates higher than long rates
• Steep: Aggressive rate cuts expected or economic recovery underway

Sri Lanka Yield Curve Drivers

• CBSL monetary policy stance (hawkish/dovish)
• Government borrowing program (supply of bonds)
• Foreign investor participation in government securities
• Inflation expectations
• IMF program conditions and fiscal targets

Step 3: Fixed Income Instruments

Government Securities (Risk-Free)

Corporate Instruments

Step 4: Equity vs Fixed Income Decision

The key question: Should the client be in equities or fixed income?

Decision Framework

Equity Risk Premium = Expected Equity Return - Risk-Free Rate

If ERP < 3%:  Favor fixed income (not enough compensation for equity risk)
If ERP 3-6%:  Balanced allocation
If ERP > 6%:  Favor equities (well compensated for risk)

When to Overweight Fixed Income

• Interest rates are at cycle highs (lock in high yields before cuts)
• Equity valuations are stretched (ASPI P/E > historical average)
• Macro uncertainty is high (political instability, FX crisis)
• Client needs predictable income (retirees, near-term obligations)

When to Overweight Equities

• Interest rates are falling (fixed income yields compress, equities benefit)
• Equity valuations are cheap (ASPI P/E < historical average)
• Economic recovery underway
• Client has long time horizon and high risk tolerance

Step 5: Investment Recommendations

For Each Fixed Income Recommendation

Ladder Strategy

For fixed income allocation, recommend a bond ladder:

• 25% in short-term (< 1 year): T-bills, short FDs
• 50% in medium-term (1-3 years): T-bonds, debentures
• 25% in long-term (3-5+ years): Long T-bonds (if rates attractive)

This provides:

• Regular reinvestment opportunities
• Protection against rate changes
• Predictable cash flow

Step 6: Impact on CSE Equities

Always connect fixed income analysis back to equity implications:

• Rate cuts → Bullish for equities: Lower discount rate, cheaper borrowing
  • Sectors benefiting: Property, construction, consumer (rate-sensitive)
• Rate hikes → Bearish for equities: Higher discount rate, expensive borrowing
  • Sectors hurt: Property, high-debt companies, NBFIs
  • Sectors helped: Banks (wider NIMs initially)
• Yield curve steepening → Bullish for banks: Net interest margin expansion
• Yield curve flattening → Cautious for banks: NIM compression risk

Sri Lanka-Specific Notes

• CBSL auctions T-bills weekly (Wednesday) — yields set the market benchmark
• Government securities are exempt from withholding tax
• Corporate debenture interest is subject to withholding tax
• Primary dealers have access to government securities at auction
• Secondary market for government securities is OTC (not on CSE)
• Fitch Ratings Lanka and ICRA Lanka are the main local rating agencies
• CBSL deposit insurance covers up to Rs. 600,000 per depositor per bank

Examples

Example 1: Interest Rate Outlook

User: "What's happening with interest rates?"

1. Check latest CBSL data and monetary policy news
2. Analyze yield curve shape and changes
3. Provide rate outlook (rising/stable/falling)
4. Advise on fixed income positioning and equity impact

Example 2: FD vs Equity

User: "Should I keep money in FDs or invest in stocks?"

1. Compare current FD rates vs expected equity returns
2. Calculate equity risk premium
3. Consider client's time horizon and risk tolerance
4. Recommend optimal split with specific instruments

Example 3: Debenture Evaluation

User: "XYZ debenture is offering 14%. Should I invest?"

1. Check issuer's credit rating and financial health
2. Compare yield to government securities (credit spread)
3. Assess if the spread compensates for credit risk
4. Recommend SUBSCRIBE/AVOID with reasoning