Sri Lanka’s sovereign bond yields spiked in April following a sudden tariff imposition by U.S. President Donald Trump, who slapped a 44% duty on imports from the island nation. The tariffs, however, have been temporarily suspended for 90 days, offering a brief window of relief.
Despite the pause, market volatility has intensified. The yield on Sri Lanka’s 4% plain vanilla bond due in April 2028 has now dropped below 7%, hovering around what analysts consider the “market access” level.
Meanwhile, macro-linked (GDP-linked) bonds have come under significant pressure. The 2030 issue saw its yield jump from 5.76% in mid-March to 8.06% by last week, according to data from the Central Bank. Similarly, the 2033 bond rose from 7.17% to 8.72%.
Governance-linked bonds—structured so yields drop when reform benchmarks are achieved—have witnessed a dramatic spike as well. Previously trading near 1%, they have now soared above 11%, reflecting heightened investor anxiety.
Sri Lanka’s bonds, like many issued by emerging markets, are known for their limited liquidity, making them prone to sharp price swings. This comes at a time when global treasury markets are under strain due to rising U.S. budget deficits and the disruptive impact of new trade tariffs.
The broader context behind this volatility stretches back to April last year, when ECONOMYNEXT’s economic columnist warned of looming instability in U.S. Treasury markets. That warning followed years of macroeconomic policies aimed at reducing reliance on foreign creditors.
Both the U.S. Treasury and the International Monetary Fund (IMF) had taken steps to dismantle what they termed the “Asian Savings Glut”—a trend that had previously supported U.S. debt markets. This policy shift encouraged nations like China to abandon pegged exchange rates and reduce their U.S. bond holdings.
China, which once held over $1.2 trillion in U.S. Treasuries, has now cut its exposure to around $700 billion. In 2014, China amended the legal framework governing its central bank, allowing for a near-complete float of its currency and a halt to reserve accumulation.
The move echoes recent developments with the Bank of Russia, which opted for a clean float and dramatically hiked interest rates to 22% after its foreign reserves were frozen by the U.S. The policy shift deprived the U.S. of triggering a currency crisis through a collapsing soft-peg—a scenario similar to Sri Lanka’s past financial challenges.
As geopolitical tensions and economic recalibrations continue, Sri Lanka’s debt markets remain at the mercy of global forces far beyond its shores.