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Analysts have noted that growing anticipation of a potential interest rate cut by the United States Federal Reserve in September is fueling interest in high-yield foreign currency bonds from Nigeria, Gabon, and Kenya.
Minutes from the US Fed’s July meeting, released on Wednesday, suggested that officials are moving closer to reducing interest rates. According to a Bloomberg report on Thursday, some analysts believe that certain debt securities from these African nations are currently mispriced and have the potential for further rallying.
Over the past month, the Bloomberg index of dollar-denominated sovereign bonds indicated that bonds from Nigeria, Gabon, and Kenya underperformed compared to their emerging- and frontier-market counterparts. Gabon’s bonds lost 1.2%, Nigeria’s fell by 0.5%, and while Kenya’s bonds gained 1.1%, this was still below the average 2.5% return seen in the index.
However, the report highlighted that in the past week, these bonds have outperformed, driven by a risk rally spurred by signs that the Fed might ease its policy in September. Analysts attribute Nigeria’s improved bond performance to the country’s rising oil production and growing foreign exchange reserves, which are seen as strengthening the economy and boosting investor sentiment.
“African Eurobonds have already seen significant rallies this year, which might limit further gains for most of the continent’s frontier bonds,” said Thalia Petousis, a Cape Town-based portfolio manager at Allan Gray. “But investors are still discerning based on the underlying fundamentals,” she added, pointing to investment opportunities in Kenya following the unrest that began in June.
Danske Bank, a Danish multinational banking and financial services corporation, highlighted Nigeria’s attractiveness, citing higher foreign exchange reserves, increased oil production, and ongoing reforms, despite the recent riots that spread from Kenya.
Nigeria’s oil output rose to 1.75 million barrels per day of crude and condensates in August, with the Nigerian National Petroleum Corporation Limited (NNPCL) projecting that production could approach two million barrels per day by the end of the year. Additionally, external reserves were reported at $36.45 billion as of Wednesday, according to data from the Central Bank of Nigeria.
On the outlook for yields, Mark Bohlund, a senior credit research analyst at REDD Intelligence, noted the potential for Nigerian eurobond yields to tighten, citing the relatively strong state of the country’s external accounts. However, he also pointed out the ongoing uncertainty surrounding economic policymaking.
Bohlund also expressed optimism about Gabon, where bond yields do not yet reflect the country’s multi-year high in oil output. “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,” he said.
Kevin Daly, a portfolio manager at London-based Abrdn Investments Ltd., added that “African high yielders will generally benefit from Fed easing, with high beta names such as Nigeria, Kenya, and Angola likely to outperform in the region.”
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