New benchmark will track $330bn in local-currency debt across 26 markets, boosting visibility of Nigerian bonds….
Nigeria is set to regain a place in the global fixed-income investment space, with J.P. Morgan including the country in a new frontier-market index that will assign Nigerian government bonds a 7.4 percent weighting.
The new benchmark, known as the Government Bond Index–Emerging Markets Edge, or GBI-EM Edge, is expected to be launched before the end of September.
The index will track approximately $330 billion worth of local-currency government debt across 26 countries, placing Nigeria among its major constituents alongside Egypt, Vietnam, Morocco, Kazakhstan, Bangladesh, Pakistan and Sri Lanka.
Under J.P. Morgan’s methodology, no individual country can account for more than eight percent of the index.
Nigeria’s proposed 7.4 percent allocation therefore puts it close to the maximum permitted weighting and could give the country’s domestic government securities greater exposure among international fixed-income investors.
The move marks a significant development for Nigeria’s debt market, coming nearly 11 years after the country was removed from J.P. Morgan’s GBI-EM in 2015.
Its inclusion in the new benchmark could improve the visibility of Nigerian government securities among global fund managers, particularly investors seeking higher-yielding debt instruments in frontier markets.
J.P. Morgan has reportedly spent several years developing the new index as demand grows for government debt offering relatively high returns in less-developed emerging and frontier economies.
The proposed benchmark will comprise government bonds with a minimum equivalent value of $250 million and at least 2.5 years remaining to maturity.
African markets are expected to make up almost 45 percent of the index, while frontier markets in Asia are projected to account for close to one-third of its composition.
The index is also expected to offer significantly higher yields than J.P. Morgan’s broader emerging-market local-currency bond benchmark.
The the new index is projected to have an average nominal yield of about 10.4 percent roughly 440 basis points above the mainstream emerging-market local-currency index.
Historical back-testing also suggests the benchmark could have delivered stronger returns.
Reuters reported that simulations showed the new index would have outperformed the conventional emerging-market local-currency index by about 1.2 percentage points since the end of 2017.
The development is important because global fund managers closely monitor major bond indices when determining how to allocate capital across different markets.
Nigeria’s return to a J.P. Morgan benchmark could therefore increase international investor attention towards its local-currency debt market and potentially support greater participation in government securities.
The move also follows efforts by the Federal Government to regain access to major global bond benchmarks.
Earlier this year, the government disclosed that it was in discussions with J.P. Morgan over Nigeria’s possible return to its government bond index for emerging markets.
Nigeria’s removal from the GBI-EM in 2015 followed concerns over the country’s foreign-exchange market and the ability of international investors to access and repatriate funds.
The proposed GBI-EM Edge inclusion now offers Nigeria an opportunity to re-establish its presence within a major global fixed-income benchmark, subject to the index’s final launch and implementation.
