Frontier Bond Investors Fear Sell-off May Be Due
January 5, 2015
After a blockbuster year for frontier bonds, investors are bracing themselves for a bumpier ride in 2015.
Bonds of so-called frontier countries—those nations a tier lower in economic development than emerging markets like India and China—have rallied sharply in 2014 as unexpectedly low yields in the developed world pushed investors to search for higher returns off the beaten path in places like Vietnam and Ivory Coast. Bond sales from first-time issuers such as Ethiopia and Kenya have seen strong demand from money managers around the globe, leading frontier countries to sell a record $37 billion in debt in 2014.
The risky bets have paid off for investors so far. Frontier bonds returned 10.5% to investors in 2014, outperforming the 5.5% return of a broader basket of emerging-market bonds, according to indexes owned by J.P. Morgan Chase JPM -3.10% & Co. That compares with a 5% return in U.S. Treasurys in the same period.
However, frontier bonds have rallied so much that investors warn the asset class could be due for a selloff, especially bonds of oil exporters such as Nigeria and Ecuador, which already are suffering from the recent plunge in energy prices. Frontier bonds now offer just 4.96% in extra yield over comparable U.S. Treasurys, down from 6.05% at the start of 2014. That gives these countries less of a cushion against any shock to their financial markets, as investors would find the extra yield they provide less enticing.