Interest in high-yield foreign currency bonds from Nigeria, Gabon, and Kenya has increased due to expectations of a rate decrease by the US Federal Reserve in September, as Analysts reveal.
The US Federal Reserve’s July meeting minutes, which were made public on Wednesday, showed that officials were getting closer to lowering interest rates.
Analysts suggested that some of those debt securities are mispriced and have room to rise further, citing Bloomberg Report on Thursday.
Bonds from all three of these emerging- and frontier-market peers had underperformed during the past month, according to the Bloomberg index of dollar-denominated sovereign bonds. Bonds from Gabon lost 1.2%, Nigerian bonds fell 0.5%, and Kenyan bonds gained 1.1%. However, they still lagged below the index’s average return of 2.5%.
The study BrandSpur digital news brand accessed did note that those bonds had performed better over the previous week during a risk-on rally sparked by indications the Fed will loosen policy in September.
The researchers stated that Nigeria’s expanding foreign exchange reserves and increasing oil output were supporting the country’s economy and influencing public opinion.
“Many African Eurobonds have already rallied strongly this year,” according to Thalia Petousis, a portfolio manager at Allan Grey with offices in Cape Town, which may limit additional gains for the majority of the continent’s frontier bonds.
She went on, mentioning prospects in Kenya following the June-starting conflict: “But investors are still using discernment around the underlying fundamentals.”
Nigeria was mentioned by Danske Bank, a multinational banking and financial services company based in Denmark, that it: “Looks very attractive, with higher FX reserves, rising oil production, and continued reforms – despite the riots spreading from Kenya.”
Nigeria produced 1.75 million barrels of crude and condensates per day in August, and according to NNPCL projections, the country will produce close to two million barrels per day by the end of the year. Also, according to figures from the Central Bank of Nigeria, external reserves were $36.45 billion as of Wednesday.
“The external accounts are also in a relatively strong state, but uncertainty over economic policymaking is still high,” stated Mark Bohlund, a Senior Credit Research Analyst at REDD Intelligence, regarding yield prospects that Nigeria may see a tightening of euro bond yields.
Bohlund is particularly optimistic about Gabon, whose multi-year high oil output is not reflected in yields.
Continuing, he had this to say: “The yields largely reflect uncertainty about the spending plans of the current military junta, heavily influenced by the very negative International Monetary Fund report released in May.”
“African high yielders will generally benefit from Fed easing, with high beta names such as Nigeria, Kenya, and Angola likely outperforming in the region,” regarding Kevin Daly, portfolio manager at London-based Abrdn Investments Ltd.
