In a test of the market on Tuesday, the Government of Jamaica floated a two-month treasury bond that is not only significant for its tenure but was priced at a fixed 12 per cent per annum, in line with goals of the new debt management initiative (DMI).

The bond will remain open to subscription until January 22, and will be redeemed close to fiscal year-end on March 12, 2010.

The typical treasury bill has either a three- six-, or nine-month tenure and is auctioned by the Bank of Jamaica on behalf of government.

The finance ministry's debt management unit, which is handling the special float, says the proceeds are for budgetary support, but if the market were to go after the bond it would signal a willingness to accept the new terms under the debt replacement programme to be addressed in a national broadcast by Prime Minister Bruce Golding tonight.

Bank of Jamaica governor Bryan Wynter is expected to outline more details in a briefing on Thursday.

Offering holders

The Golding administration has not said officially just how deep a cut it will be offering holders of domestic debt, but market players say that the International Monetary Fund (IMF) is pushing for 100 per cent take-up by local creditors.

As at November, the domestic debt stood at J$735.6 billion, inclusive of treasury bills.

Market sources say, however, that the $3.8 billion of outstanding Treasuries will be exempt from the debt programme.

The US$6.67 billion (J$598.19 billion) of external debt is also exempt.

The total debt stands at J$1.33 trillion, and is expected to close the fiscal year at around 137 per cent of Gross Domestic Product.

Another $5.7 billion in loans from commercial banks and other institutions are also likely to get separate treatment.

The Government's news service reported that the Government hopes to save J$40 billion from the initiative in the first year.

Minna Israel, president of the Jamaica Bankers Association and head of RBTT Bank Jamaica, said it would be politically incorrect to comment on the timing of two-month bond offer, saying the ministry consistently seeks to raise funds from the capital markets.

"With the level of uncertainly now it is difficult to give any prognosis on this and we just have to wait and see how the market respond," said Israel.

Still, the ministry's bond issues tend to have tenures of no less than one year, and the 12 per cent coupon is close just to four points behind the current three-month yield on Treasuries, which in December was 15.95 per cent.

Signal rate

Financial Analyst John Jackson said, however, that the pricing was in line with the BOJ's signal rate, which was last set at 11 per cent on 60-day instruments.

"It is in keeping with where Bank of Jamaica repo rates are," said Jackson.

Israel said, broadly speaking, there was support for government from bankers to reduce rates in a fashion that would stimulate economic growth, but said she would not be drawn on whether the terms of the DMI had found favour with bankers.

"Not at liberty to say," she said Tuesday. "Can't speak to it as we are still doing discussions."

The DMI will be the second attempt to structure a bond call. The first, which had strong private sector input in its construction, was reportedly killed by objections from financial institutions, fearing it would impair their balance sheets.

The Golding administration later said the arrangement would not have saved the Government a lot of money.

Wynter said last week that the central bank had funds secured so that if financial institutions were impaired, it would shore them up with cash.

It emerged this week that the IMF and other multilateral sources have committed some US$400 million to a special fund.

Like Israel, few analysts were willing to speak on what the timing of the 12 per cent offer meant, which was opened one month after the rejection of 17 per cent bonds that BOJ eventually bought up to give the Government J$18 billion of cash to finance its operations.

Market standpoint

But, said Dean McDonald, vice-president of portfolio management and research at First Global Financial Services, "From a market standpoint they ... will take it as an indication that rates could be heading much lower."

"While the market did not expect it," McDonald said of the two-month bond, "it was clear that the market was not buying long-term and the Government sees this as one way to have better success to raise money - a better chance of raising the liquidity it needs," McDonald said.

Since last year the Bank of Jamaica has cut interest rates six times on its open market instruments, with the last adjustment on December 18 slicing two points off each tenor to a range of 10.5 per cent on the one-month tenor to 15 per cent on the six-month.

Market sources say that the discussions on how low interest rates should go is still a contentious issue among both the IMF and Jamaican authorities, and that an 8.0 per cent floor has been mooted and rejected.

Now our sources say that the discussions are centred around keeping rates above the one-month repo rate on offer from the BOJ, now at 10.5 per cent.

The government news agency said the bonds would be replaced at par value.