By JPMorgan is set to launch its long-awaited frontier-market local-currency government bond index by the end of September, covering nearly $330 billion of debt across 26 countries, with African markets accounting for almost 45% of the weighting.
The JPMorgan frontier bond index, known as the Government Bond Index-Emerging Markets Edge, or GBI-EM Edge, is designed to track local-currency government debt in frontier markets that are generally outside JPMorgan’s main emerging-market government bond benchmarks.
The index will include bonds with at least $250 million equivalent outstanding and a minimum of 2.5 years remaining to maturity, according to a JPMorgan note to investors. Individual countries will have a maximum weighting of 8%.
African countries will account for almost 45% of the index, while Frontier Asia, led by markets including Vietnam, Kazakhstan, Pakistan and Bangladesh, will make up nearly one-third. The index will cover about 26 markets and 24 currencies.
The benchmark is expected to have a nominal yield of about 10.4%, roughly 440 basis points above JPMorgan’s established emerging-market local-currency index, according to the Reuters report.
Back-testing indicated that the new index would have delivered annualised returns about 1.2 percentage points higher than the mainstream benchmark since the end of 2017.
The index gives a significant role to African government bond markets, including Nigeria, Kenya, Egypt, Morocco, Tunisia, Uganda, Zambia and other African issuers.
JPMorgan’s September 14 index research assigned Nigeria a 7.4% weighting, while Kenya received 6.91%, Tunisia 5.32% and Uganda 4.84%, according to details reported from the bank’s research.
Egypt and Morocco are among the countries assigned the maximum 8% weighting. Nigeria’s inclusion marks its return to a JPMorgan government bond benchmark more than a decade after the country was removed from the bank’s flagship index in 2015.
Nigeria’s eligible securities represent about $17.47 billion across 16 instruments, with an average yield to maturity of 17.1%, according to JPMorgan’s research cited by Nairametrics.
Zambia has also qualified for the new benchmark after increasing the size of its local bond issues, addressing concerns that its securities could fall below the index’s minimum size requirement.
Angola, meanwhile, has been working to open its domestic government bond market to foreign investors. Finance Minister Vera Daves de Sousa said the government was discussing potential inclusion in JPMorgan’s planned index as part of efforts to broaden access to the $18.6 billion domestic bond market.
Bond indexes are closely followed by international asset managers because they provide benchmarks for measuring portfolio performance and can influence how institutional investors allocate money across markets.
JPMorgan’s new benchmark comes as local-currency emerging-market debt has expanded.
Reuters reported that tradable local-currency emerging-market debt has grown to around $1 trillion over the past decade, from roughly one-third of that level. The new index would represent about $330 billion of that market.
The creation of a major benchmark could also increase the visibility of smaller domestic bond markets among international investors.
Economists have argued that deeper local-currency markets can help governments reduce exposure to foreign-currency borrowing, although local markets remain subject to currency, inflation, liquidity and credit risks.
Frontier economies remain relatively underrepresented in global capital markets.
The World Bank has said frontier economies account for about one-fifth of the world’s population but receive only about 3.1% of global capital flows and contribute less than 5% of global gross domestic product.
Their populations are projected to increase by about 800 million over the next 25 years.
JPMorgan’s index will not be the first benchmark covering frontier local-currency government debt. FTSE Russell has operated a comparable index since 2021. JPMorgan’s benchmarks, however, are widely used by emerging-market asset managers to measure performance and construct portfolios.
The planned launch therefore puts a larger group of African domestic bond markets within a benchmark followed by global fixed-income investors.
For African governments, the development comes as several countries seek to deepen domestic capital markets and diversify funding sources. For investors, the index creates another benchmark through which the performance of frontier-market local-currency government debt can be assessed.
JPMorgan is expected to launch the GBI-EM Edge by the end of September, completing a project that has been in development for several years.
