Investors have started to penetrate deeper into frontier markets such as Uzbekistan and Tanzania as they seek higher yields and look for assets that do not move with those in large developing countries.
The European Investment Bank issued its first-ever Georgian lari border local currency note on Monday, responding to a surge in demand for high-yield but riskier debt in previously untapped countries.
Craig McLeod, head of emerging markets at MarketAxess, the electronic bond trading platform, said the relatively low yields on many fixed income assets were pushing investors into less popular markets such as Kazakhstan, Serbia and Egypt, where short-term bonds can earn as much as 8 percent.
“A few years ago, I was talking to three of the biggest frontier market asset managers. This has been extended to almost all of our clients this year, ”said McLeod.
Currency-linked Eurobonds issued by organizations in frontier markets provide average coupon payments of 9%, according to TCX, a Netherlands-based fund that helps borrowers hedge currency risk on debt that ‘they sell.
By comparison, the yield on a basket of local currency bonds sold by emerging market governments that most investors can access is less than 5%, according to the JPMorgan GBI-EM Diversified Global Index.
The Georgian deal follows shortly after Dutch development bank FMO issued a $ 10 million Kenyan shilling note on Thursday last week.
“We have seen growing demand and larger transactions in offshore markets in local currency,” said Matthijs Pinxteren, treasury director of The Hague-based FMO, noting that the recent $ 50 million offshore bond in Local currency of the Uzbek government had a high demand.
“Supported by the low yield. . . environment, this obligation has been significantly oversubscribed, ”he declared.
Since 2015, 270 currency bonds have been sold, raising nearly $ 5 billion, according to TCX. After participating in over 100 issues, TCX recently launched a Frontier Market Currency Index to facilitate access to these markets.
The index tracks the debt of agencies such as the European Bank for Reconstruction and Development and the African Development Bank, issued in local currency. These currency-linked Eurobonds have high-quality credit ratings, trade in international markets and are settled in dollars and euros. This means that the investors who hold them are relatively insulated from credit risks and instead rely on the local currency.
“To our own surprise, we learned that there were buyers keen to know about the market risk and the return of Papua New Guinea, Uzbekistan and Tanzania, provided the currency risk and return come with triple A credit risk, ”said Ruurd Brouwer, Chief Executive Officer of TCX.
Gyula Toth, portfolio manager at Macquarie Group, said he was exposed to frontier markets through bonds issued by supranational banks and denominated or linked to the local currencies of emerging countries.
“[By] by investing in these markets, we aim to reduce the correlation with major emerging market currencies and at the same time achieve a return that reflects the local macroeconomic context, ”said Toth.
Not covered – Markets, finances and strong opinion
Robert Armstrong dissects the most important market trends and explains how the best minds on Wall Street are responding to them. Sign up here to receive the newsletter directly to your inbox every day of the week
Axel van Nederveen, treasurer of the European Bank for Reconstruction and Development, noted that while increasing local currency financing in border markets was a top priority, only around 15% of the agency’s loans were made in local market currencies.
While the market had risen over the past three years, rising yields in developed markets since early 2021 presented a risk, said Charles Robertson, chief economist at Renaissance Capital.
He added that appetite for these bonds would depend heavily on how quickly investors think the US central bank reacts to rising inflation, as rising yields in the US would hurt the attractiveness of markets. border workers.
The opportunities are still there for now, according to Bank of America strategists, who ranked dollar brokerage against the Kazakh tenge and Ghanaian cedi among their favorite trades in April. Athanasios Vamvakidis, a currency strategist at the US bank, described the tenge as a diversification trade and cited attractive yields as the rationale for the cedi.
“[The 11 per cent potential return] make Ghana the most attractive. . . border transport trade, ”he said in a note.