Border debt shines as an unlikely haven in a rate-rising world

(Bloomberg) – As the hunt for investments capable of withstanding rising interest rates accelerates, cross-border assets gain popularity relative to their larger peers in emerging markets.

Bonds from the world’s least developed economies have returned 2.6% this year, keeping pace with their 2020 performance, while top-ranked emerging market debt has lost nearly 2%, wiping out some up 5.3% from last year, according to JPMorgan Chase. & Co. index.

With growing speculation that the world’s post-pandemic economic recovery is fueling inflation, bonds from small developing countries are attracting buyers as their securities tend to be of shorter duration – meaning they are less. sensitive to expectations of rising interest rates. The average maturity of frontier market sovereign bonds is six years, compared to 7.9 years for traditional emerging markets, according to the JPMorgan indices.

“People are always worried that interest rates have to rise and they are looking for yield and duration of interest rates,” said Leo Hu, who co-manages the $ 7 billion emerging market debt fund at NN Investment Partners in Singapore. Frontier bonds could generate a return of at least 9% over the next 12 months, check out Consolidationnow he said.

Growing interest in cross-border assets nonetheless poses a threat to the global economy as central banks return to policy tightening mode. Less developed countries, such as those in Africa, have a higher risk of default than their larger counterparts in emerging markets. And the more funds they attract, the greater the threat of potential contagion if rising borrowing costs hamper economic growth.

In Africa

Geographically, fund managers specializing in border assets are almost united in favoring Africa, saying the region will benefit the most from rising commodity prices. These include Angola, Ghana and Zambia – although the latter became the first African country in the Covid-19 era to default when it skipped a Eurobond payment last year.

Zambia benefited as copper hit record highs, with demand supported by the global recovery and the shift to green energy. The metal accounts for nearly 80% of Zambia’s export earnings. The country’s dollar debt has returned 24% this year amid the prospect of an International Monetary Fund bailout, just behind Ecuador among some 75 emerging markets tracked by the Bloomberg Barclays Indices.

Angola, Africa’s second-largest oil producer, is another favorite. A pandemic-triggered drop in crude prices last year led the country to seek $ 6.2 billion in aid from major creditors, allaying fears of a default in one of the worst countries. most indebted on the continent. Angola bonds have returned 12% this year, according to a Bloomberg Barclays index.

African bonds also stand out from their peers in terms of yield. Ghana 2025 securities currently return 6.3%, while Angolan debt of similar maturity returns 7%, according to data compiled by Bloomberg. This contrasts with traditional emerging markets. Indonesian 10-year bonds return only 2.4%. Mexico yield 3.1%.

“We have allocated more to border sovereign credits,” said Jens Nystedt, New York fund manager at Emso Asset Management, a specialist in fixed income investments in emerging markets, overseeing $ 6.8 billion. “In particular, we appreciate the prospects for Nigeria, Ghana and Angola, as they would be among the main beneficiaries of the increase in oil prices.”

Rescue program

Sentiment towards frontier markets was also boosted this year after the International Monetary Fund announced a plan to create $ 650 billion in additional reserve assets to help developing economies cope with the pandemic. .

IMF support has been crucial for Pakistan, which raised $ 2.5 billion in March after resuming a $ 6 billion bailout program. Ecuador’s new government plans to strike a deal with the IMF to ensure financial stability and release some of the funds tied to the $ 6.5 billion financing deal reached last year.

Bonds from border countries offer higher yields for a reason: they are considered more likely to default. But many fund managers are not discouraged.

“There are quite a few risks, like a worsening pandemic or too much stimulus, but we are sticking to the rosier scenario for frontier markets,” said Edgardo Sternberg, co-manager of the markets debt portfolios. Emerging Markets in Boston at Loomis Sayles & Co., which oversees $ 3.5 billion of developing country bonds. “Frontier markets should continue to outperform,” he said.

Central bank meetings in Nigeria, Kenya and Angola will be the focus of attention this week. Elsewhere, policymakers in Indonesia and South Korea will also decide interest rates.

Pending rates

• Nigeria is expected to keep its policy rate unchanged on Tuesday, as the fragility of its economic recovery outweighs concerns about inflation, which remained more than double the bank’s official target in April.
• The monetary authorities of Kenya and Angola are also expected to maintain their rates on Wednesday and Friday respectively.
• While the central banks of Indonesia and South Korea are likely to keep rates stable this week, the focus will be on signs of a change of course in the coming months.
  • On Tuesday, traders will watch to see if the Bank of Indonesia is prioritizing currency stability over supporting growth amid worries about accelerating global inflation and the slow pace of vaccinations in the country. the country. The rupee was the worst performing currency in Asia last week and the country’s sovereign bonds extended their losses
  • The Bank of Korea’s growth and inflation forecasts will be center of attention on Thursday as the central bank updates its economic projections
• While Colombia’s central bank meets on Friday, rally is not a monetary policy meeting, according to Bloomberg Economics
  • Investors will see further impact on the Colombian market as the country faces more credit downgrades, which would consolidate its loss of investment grade status.

Economic data

• China’s industrial profits likely continued to post double-digit growth in April, although the pace may have slowed from March, according to Bloomberg Intelligence. Faster ex-factory inflation was likely a support as well as strong exports, economists including Chang Shu wrote in a note.
  • The onshore yuan remains near its highest level since 2018 amid improving prospects for the Chinese economy. It is set to become Asia’s top-performing currency this month after the Indian rupee
  • Chinese debt is also outperforming all of its emerging market peers; the benchmark 10-year sovereign yield has fallen by nine basis points since the start of the year
• Data due Monday should show Taiwan’s industrial production in April rose at the fastest pace since January, while unemployment could have fallen to 3.7%, the lowest in more than two years.
  • The Taiwan dollar has remained resilient in recent weeks, supported by strong demand for the country’s exports, even as a worsening Covid-19 epidemic has forced authorities to expand the lockdown to the entire island.
• Investors will also receive an update on improving the region’s trading sector, with figures for Thailand and Malaysia expected on Tuesday and Friday, respectively.
• Russia’s industrial production and inflation figures will be scrutinized, with the ruble beating most of its peers over the past month in the face of further policy tightening. Data comes Tuesday and Wednesday respectively
• Mexico’s bimonthly inflation reading forecast for Monday is expected to show a decline in the first half of May
  • On Wednesday, traders will be watching final first quarter gross domestic product data for any changes from last month’s estimate.
  • Bloomberg Economics expects Thursday’s release of last central bank meeting minutes to reflect less conciliatory tone
• According to Bloomberg Economics, Brazilian CPI consumer price inflation data for May, due for Tuesday, will likely see a rise amid rising electricity prices.
  • Investors will be watching April’s current account numbers on Wednesday for signs that a strong trade surplus has boosted the balance. Unemployment figures the next day may reflect increased restrictions in March as infections rose.

© 2021 Bloomberg LP