Sri Lanka Bond Yields Rise After Trump Tariffs

Sri Lanka's sovereign bond yields experienced significant volatility in April following the announcement of steep tariffs by former U.S. President Donald Trump. The 44 percent tariffs imposed on the island nation were temporarily suspended for 90 days, but the initial shock sent bond yields soaring before a partial recovery.

The yield on Sri Lanka's 4 percent plain vanilla bond, maturing in April 2028, initially spiked but later fell below 7 percent, a level considered indicative of market access. Meanwhile, yields on macrolinked bonds, which adjust based on GDP performance, showed sharp increases. A bond due in 2030 rose from 5.76 percent in midMarch to 8.06 percent by last week, while a 2033 bond climbed from 7.17 percent to 8.72 percent, according to central bank data.

Governancelinked bonds, which offer lower yields if certain benchmarks are met, saw even more dramatic movements. Previously trading around 1 percent, their yields surged past 11 percent. Analysts note that Sri Lanka's bonds are relatively illiquid, making them prone to large price swings—a common trait among bonds issued by developing nations.

The upward pressure on yields coincides with broader turbulence in U.S. Treasuries, driven by concerns over large federal budget deficits and the Trump administration's trade policies. Investors have grown increasingly cautious, though warnings about potential disruptions in the U.S. bond market were raised as early as last April. At that time, economic analysts cautioned that foreign demand for U.S. Treasuries could weaken due to shifts in global monetary policies.

Both the U.S. Treasury and the International Monetary Fund had previously criticized what they termed an "Asian Savings Glut," arguing that excessive reserve accumulation by countries like China distorted global markets. Efforts to push China away from a pegged exchange rate gained traction in 2014 when Beijing amended the governing law of the People's Bank of China, adopting a nearclean floating exchange rate and halting largescale reserve accumulation.

China's holdings of U.S. Treasuries, which once exceeded $1.2 trillion, have since dwindled to approximately $700 billion. The reduction in demand from one of the largest foreign buyers has contributed to instability in the U.S. bond market.

Further disruptions emerged when the U.S. froze the foreign reserves of the Bank of Russia, effectively eliminating another major buyer of U.S. debt. In response, Russia abandoned its softpeg exchange rate regime, allowing its currency to float freely while hiking interest rates to 22 percent. This move averted a potential crisis similar to Sri Lanka's past struggles with sterilized interventions under a collapsing currency peg.

As global financial conditions remain uncertain, Sri Lanka's bond market continues to reflect broader anxieties over trade policies, monetary shifts, and geopolitical tensions. Analysts warn that further volatility may lie ahead, particularly if U.S. fiscal pressures persist or if additional trade restrictions are imposed.