News Column

Low Yields Propel Frontier Debt Revival

June 18, 2014

Obinna Chima

Investors are returning to the riskier, less developed bond markets in Africa and other frontier economies, burying memories of past setbacks and plunging in after global yields failed to rise as much as expected.

Stuck for a place to find yield, they are targeting frontier markets - a tier below the larger, more established emerging economies - in Africa as well as Asia, Eastern Europe and Latin America.

"There is so much risk appetite; people are being pushed into anything that has yields," Fund Manager at Investec Asset Management, Antoon de Klerk, was quoted to have said by Reuters.

"It seems that the market has quite a short-term memory," he said.

United States Treasury yields have not risen as high as many predicted a year ago, when the then Federal Reserve Chairman, Ben Bernanke, hinted that the central bank would reduce its bond-buying.

This programme, designed to boost the US economy, had kept yields depressed and encouraged investors to move funds into emerging markets for better returns.

The prospect that the purchases would be wound down prompted an emerging market sell-off last year, but this has partly unraveled as investors now adapt to the reality of life without Fed support.

Shortly before Bernanke changed the investment landscape, Rwanda came to the market last April with a small debut 10-year dollar bond, also at a yield of less than seven percent.

The bond's yield rocketed to nine per cent within weeks as Western investors took their money back home, where yields were rising and the outlook was safer.

Bonds from Ghana and Zambia also suffered in the months after their launch. Ghana has a widening budget deficit and rising debt, while falling copper prices have hurt top copper producer Zambia.

Specialist fund managers say it is important that investors discriminate between country risks, rather than buying a bond for its yield, regardless of its domestic policies.

Nigeria, for example, has outperformed other African dollar debt, as investors focus on the recalculation of its Gross Domestic Product which made it Africa's largest economy.

Yet the renewed enthusiasm for all things high-yield means Zambia managed to issue a second dollar bond this year, admittedly with a fatter yield than before, and frontier bond yields have subsided from their highs. Local currency debt, in contrast, has been under performing emerging and frontier dollar debt this year.

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Source: AllAfrica

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