Sri Lanka’s Dollar Bond Revival Signals Cautious Market Comeback

Sri Lanka’s battered dollar bond market once defined by default, outflows, and collapsing investor confidence is beginning to show signs of renewed strength. The Ceylon Dollar Bond Fund (CDBF) has reported an impressive 12.3% return in U.S. dollars as of mid-September 2025, indicating a tentative revival in appetite for the country’s restructured debt.

Managed by Ceylon Asset Management (CAM) and supported by Deutsche Bank as Trustee and Custodian, the fund’s strong year-to-date performance highlights growing investor confidence following Sri Lanka’s December 2024 debt restructuring. A senior official at the Sri Lanka Insurance Corporation (SLIC)—a key stakeholder—confirmed that the uptick reflects improving sentiment across global markets toward Sri Lankan sovereign assets.

CDBF is an open-ended unit trust regulated by the Securities and Exchange Commission (SEC). It invests solely in Sri Lankan International Sovereign Bonds (ISBs) and selected dollar-denominated, bank-guaranteed securities listed overseas. For investors, the fund provides a shield against rupee depreciation and enables capital repatriation in foreign currency—attributes aggressively marketed on social media to attract diaspora and regional investors.

According to CAM Managing Director Dulindra Fernando, the surge in returns stems from rising ISB prices, improving macroeconomic indicators, and policy stability. “Sri Lanka’s improving macro fundamentals have underpinned the fund’s performance,” he said, citing the rebuilding of foreign reserves to US$ 6.2 billion, falling inflation, and a steadier rupee.

Tourism earnings, worker remittances, and early signs of foreign investment inflows have further strengthened confidence. The Central Bank’s policy direction has also supported the recovery, with Governor Dr. Nandalal Weerasinghe recently forecasting that Sri Lanka could secure a sovereign rating upgrade from CCC+ to B by 2027, potentially unlocking wider access to capital markets.

Over the past ten months, CDBF’s net asset value (NAV) has risen steadily, in line with the strengthening of restructured ISBs. Market analysts note that average yields on Sri Lankan sovereign bonds have dropped from 15% in January to around 10% by October, signalling reduced default risk and improved investor sentiment. Deutsche Bank added that the recovery in sovereign valuations reflects better fiscal discipline and progress in economic reforms.

SLIC acknowledged that the fund’s performance signals the potential of disciplined investment in restructured debt, but called for strict regulatory oversight to protect investors. Research from Verité further notes that Sri Lanka’s new GDP-linked Macro Linked Bonds (MLBs) could offer returns of up to 10.3% if GDP growth exceeds 3% between 2025 and 2027. Standard Chartered analysts estimate a 67.5% likelihood of meeting that threshold—supporting the upside case for funds like CDBF.

Still, regulators warn that risks remain. The Central Bank stressed that although such funds help attract foreign inflows, they are not without exposure to global interest-rate changes, market volatility, and geopolitical shocks. CBSL also reiterated that Personal and Business Foreign Currency Accounts cannot invest directly in CDBF, and banks have been instructed to enforce the rule.

For many, however, the Ceylon Dollar Bond Fund has become a symbol of Sri Lanka’s slow but deliberate return to credibility in international capital markets a recovery built not on exuberance, but cautious rebuilding, bond by bond.