Massive inflows witnessed in the Nigeria fixed income market space as investors take advantage of CBN’s aggressive policy stance on mopping excess liquidity in the system are seeing Nigeria emerge as one of the best performing local bonds markets among peers.
Returns on Nigeria yield currently stands at 14.14 percent, while the likes of Kenya and Ecuador join in the bond rally as more dovish Federal Reserve triggered a global risk-on environment and a hunt for yield.
Frontier nations have all posted returns above 13.5 percent, far above the global sovereign average of 2.4 percent, Bloomberg data show.
Last year, frontier markets saw a decline in the performance of their bonds on the heels of hawkish United States Fed which, amongst other factors, made the risky developing market asset less attractive.
However, since the Fed announced a pause in rate hikes earlier in January, there has been renewed interest in frontier markets.
Fear of a slowing global economy which has seen a cut in the growth projection for many developed countries, including the United States which may possibly cut rates in 2019, is a factor analysts have bet to favour emerging markets as many central bankers have taken a dovish stance on policy rates.
The optimism that crude oil, which has had a strong year-to-date performance, will reach $70 per barrel and exceed budget benchmark of many oil producing frontier markets has strengthened positive sentiment of investors towards the markets.
Overseas notes from the least-developed countries are the world’s best performing bonds this year. Securities denominated in local currencies may be about to play catch-up.
With a lot of good news already priced in, some money managers and analysts, including Aberdeen Asset Management’s Edwin Gutierrez and Oppenheimer & Co.’s Nathalie Marshik, say that concerns about a global growth slowdown could start to erode returns from frontier-market overseas bonds.
Marshik says that in a low growth environment, investors should look to developing countries with the strongest balance sheets and external positions, recommending the local-currency bonds of emerging markets including Egypt, and frontiers such as Nigeria and the Dominican Republic.
“Local-currency debt is what looks interesting, because it has been the big laggard year-to-date,” said Gutierrez, a London-based money manager.
He says he’s still long on frontiers, but has turned his focus to domestic markets and is trimming risk after the rally. “If you believe that EM still has legs, this is the next stage of the rally.”
While a strong dollar last year put pressure on emerging-market currencies across the board, a newly dovish Federal Reserve may change that calculation. If the dollar falls, currencies from developing countries will have space to outperform.
“The Fed slowing down the pace of hiking will help for sure,” Oppenheimer analyst Marshik said in an interview from New York. “Global growth is definitely something to consider, but in general, low U.S. rates mean a strong carry trade.”
