LONDON, April 12 (Reuters) - Sri Lanka's government bonds jumped to their highest level since September on Monday, on reports that the government had sealed a long-awaited $500 million loan deal with the China Development Bank.
Sri Lankan bonds due to mature on July 22 climbed 2 cents to above 82 cents on the dollar having been as low as 65 cents early last month on worries that the island's deteriorating finances could lead to a default.
"The $500 million loan which will be disbursed this week, should provide a further boost to Sri Lanka’s FX reserves which the central bank recently estimated at $4.1bn in end March, excluding the $1.5bn PBOC FX swap line," analysts at JPMorgan said in a research note.
China approved a 10 billion yuan ($1.5 billion) currency swap with Sri Lanka last month.
Sri Lanka's government bonds are now some of the best performers in the world this year. They have an average total return of 16.1% year-to-date versus -3.6% for the widely followed EMBI-Global Diversified emerging market index.
JPMorgan added that the bonds were likely to find further near-term support given benign backdrop for EM sovereigns, "although we think investors should 'sell into the strength'."
Dwindling foreign reserves, a tumbling currency and rising debt levels have dogged Sri Lanka over the last year, leading to increasing fears of a default.
The government of Prime Minister Gotabaya Rajapaksa - which has drawn the country closer to China, to the frustration of neighbour India - has said this will not happen.
($1 = 6.5443 Chinese yuan renminbi)
(Reporting by Marc Jones; Editing by Hugh Lawson)
