By: Staff Writer
December 14, Colombo (LNW): Sri Lanka’s once-distressed dollar bond market is showing renewed signs of life, but the resurgence is also reviving scrutiny over the legality and regulatory boundaries governing dollar-denominated investment funds.
At the centre of attention is the Ceylon Dollar Bond Fund (CDBF), which has delivered a robust 12.3 percent return in U.S. dollar terms year-to-date by mid-September 2025, riding on the recovery of restructured sovereign debt.
Managed by Ceylon Asset Management (CAM) and supported by Deutsche Bank as trustee and custodian, the fund’s performance reflects a gradual restoration of investor confidence following Sri Lanka’s successful debt restructuring in December 2024.
A senior official at Sri Lanka Insurance Corporation (SLIC), a key stakeholder in CAM, said the fund’s gains signal cautious optimism toward Sri Lanka’s sovereign instruments after years of default-induced pessimism.
CDBF is an open-ended unit trust regulated by the Securities and Exchange Commission of Sri Lanka (SEC). Its mandate limits investments to Sri Lankan International Sovereign Bonds (ISBs) and select dollar-denominated securities backed by bank guarantees and listed on international exchanges.
The structure offers investors protection from rupee depreciation while enabling repatriation of capital and income in foreign currency features that have made the fund particularly attractive to overseas Sri Lankans amid aggressive digital marketing campaigns.
CAM attributes the fund’s rally to improving macroeconomic fundamentals. The rebuilding of foreign reserves to around US$6.2 billion, moderating inflation, and relative currency stability have underpinned renewed interest in Sri Lanka’s restructured debt. Yield compression in sovereign bonds—from roughly 15 percent in early 2025 to near 10 percent by October—has further reinforced perceptions of reduced default risk.
Still alongside optimism, regulatory caution remains firm. The Central Bank of Sri Lanka (CBSL) has reiterated that while foreign-currency funds can help attract capital, it does not endorse individual investment products. Crucially, the central bank has clarified that funds held in Personal and Business Foreign Currency Accounts cannot be directly invested in CDBF, and banks have been instructed to enforce this restriction strictly.
This clarification has raised questions among investors over compliance and marketing practices, particularly as the fund targets diaspora and regional investors. Regulators warn that strong returns should not obscure inherent risks, including global interest rate movements, geopolitical shocks, and renewed market volatility.
Analysts note additional upside from new GDP-linked Macro Linked Bonds, which could deliver attractive returns if economic growth exceeds projections. However, authorities stress that systemic stability and investor protection take precedence over performance narratives.
For many market participants, CDBF has become a symbol of Sri Lanka’s tentative return to financial credibility. Still, its success underscores the need for clear regulatory guardrails to ensure that renewed confidence does not outpace compliance in a fragile post-crisis environment.
