Already Hot Egyptian Bond Market Could Get Even Hotter | Business and Economy News

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JPMorgan Chase will add Egypt to a pool of indices, which will allow the market to receive an influx of liquidity from passive fund managers.

Through Bloomberg

Egypt’s boiling bond market has made it a favorite with emerging market investors, and they are counting on another year of big gains.

JPMorgan Chase & Co. will add Egypt – which has $ 26 billion in qualifying government bonds – to a pool of indices this month, preparing the market for an influx of liquidity from passive fund managers . Investors have already been wowed by Egypt’s high interest rates, which rank among the highest in the world after adjusting for inflation.

With global bond markets reeling from losses as the Federal Reserve turns hawkish, Egypt appears to be a beacon of hope for investors. Local bonds have returned 1.7% since December, making it one of the few emerging markets to have performed positively.

PineBridge Investments and Renaissance Capital say they expect the strong performance to continue and expect double-digit gains in 2022 – adding to last year’s 13% return, which was the second-best in the world. world and compared to an average loss of 1.2% for locals. emerging market debt.

Chart comparing Egypt's real interest rates to those of other emerging markets

The North African nation’s local currency bonds could return 17% this year, according to Anders Faergemann, fund manager at PineBridge in London.

“The process of disinflation is still intact and the exchange rate is properly valued,” he said.

In the long term, the Egyptian bond market’s record is even better. Its local bonds have earned 156% in dollars over the past five years, as reforms under agreements with the International Monetary Fund and funding from Arab Gulf allies have attracted inflows. This compares to 26% for the Bloomberg Emerging Markets Index and even beats the S&P 500 Index, which returned 133%.

Its dollar bonds are another story, with hard currency debt bearing the brunt of the risks associated with rising Treasury yields and the country’s deficits. After losing 8% last year, investors are now demanding an additional premium for holding Egyptian dollar debt – which, at 593 basis points, is similar to that of Iraq and higher than that of Gabon and Pakistan .

Real rates

Nonetheless, the country’s local currency bonds oppose the global trend of negative yields as inflation remains below central bank rates. Egypt’s so-called real interest rate – the difference between its deposit rate and inflation – is 2.35%, compared to minus 6.55% for the United States.

“With real rates this high, we don’t think the Fed raising rates modestly this year will be a key driver for Egyptian bonds,” said Jim Barrineau, head of emerging market debt at New York-based Schroders. . “The ability to keep inflation relatively contained has been key.”

(Add qualifying bonds in 2nd paragraph, update numbers throughout the process)

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