Sri Lanka, Pakistan bonds are set to offer high yields as risks ease

April 11, 2025 (MLN): High-yield bonds in Sri Lanka and Pakistan are poised to deliver attractive yield premiums as default risks decline and economic conditions improve, according to Shamaila Khan, a leading figure in emerging-market fund management.

Khan likes dollar-denominated debt of EM sovereigns and corporates, citing low default rates, attractive valuations, and positive technicals, and expects the decline in oil prices to benefit Sri Lanka and Pakistan.

The UBS Emerging Economies Corporates Bond Fund, which Khan helps manage, has beaten 94% of peers in the past five years, and Khan believes the market is not fully appreciating the improving fundamentals of these Asian countries.

A top emerging-market fund manager expects more value to emerge from some of the riskiest debt in the world that she thinks will increasingly offer attractive yield premiums, as per Bloomberg.

High-yield bonds in Sri Lanka and Pakistan, both rated junk, are among the top bets for UBS Asset Management's Shamaila Khan due to lower chances of default, and as sliding oil prices are seen as boosting their finances. She also likes the dollar-denominated debt of EM sovereigns and corporates.

"We were cautious about risk going into April, and we have become much more constructive" on considerations like low default rates, attractive valuations, and positive technicals, said Khan, the head of fixed income for emerging markets and Asia Pacific for UBS in New York.

The UBS Emerging Economies Corporates Bond Fund, which Khan helps manage, is one of the top-performing funds in its segment, beating 94% of peers in the past five years.

Sri Lanka has restructured most of if debt with bondholders, while Pakistan's economy is on a stronger footing, re-emerging from the brink of a collapse in 2022.

Pakistan reached an agreement with the International Monetary Fund last month for $2.3 billion in loans in a show of confidence by the global lender.

Sri Lanka's 3.6% 2036 dollar-denominated bond has a yield of about 10% and compares with 4.41% on the 10-year US Treasury bond. Pakistan's 2051 bond yields about 13%.

"At the end of the day, as a fixed income investor, what I care about the most is that my credits pay me back, and you're getting very attractive yields, with very little default risk," Khan said.

Another factor that may help the Asian assets is more than 20% drop in oil prices from this year's peak in January, Bloomberg further added.

That's a relief for both Sri Lanka and Pakistan, with oil making up about 21% of Sri Lanka's total imports in 2024 and nearly 30% for Pakistan.

"Oil prices for many of these Asian countries are offsetting the impact of tariffs on their trade deficits," said Khan.

"These are things that the market is not realizing because it's in such a volatile environment that the fundamentals are not sinking in, but they always do."

The US had imposed 44% tariffs on Sri Lanka and 29% duties on Pakistan, which are currently paused in a respite for the countries.

Pakistan plans to send a high-level mission to Washington for talks on the tariffs, while Sri Lanka has appointed a committee to study the new levies. 

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