JPMorgan Chase & Co will add Egypt to a batch of bond indexes this month, setting the market up for a flood of liquidity from money managers with dormant strategies. Indeed, investors are tempted by the high Egyptian interest, which is among the highest around the world, after weighting it according to inflation.
With global bond markets reeling from losses as a result of the Fed’s shift to a hawkish stance, Egypt appears to be a bright spot for investors. The yield on domestic bonds has been at 2% since December, making it one of a handful of emerging markets performing positively.
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highest return
Bain Bridge Investments and Renaissance Capital expect continued strong performance, as well as double-digit gains in 2022 – adding to last year’s 13% return, which was the second best in the world compared to domestic emerging market debt losses of 1.2% in average.
The yield on local-currency bonds in the North African country is expected to reach 17% this year, according to Anders Vergemann, money manager at Pine Bridge in London. He said, “The process of thwarting inflation is still sound, and the exchange rate is a fair appraisal.”
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Moreover, in the long run, the record of the Egyptian bond market is better, and the return on its domestic bonds reached 156 percent in dollars over the past five years, as a result of attracting inflows from the reforms implemented under agreements with the International Monetary Fund and financing from allied Gulf countries, compared to a return of 26 % of the “Bloomberg” emerging markets index, and even beat the “Standard & Poor’s 500” index, which achieved a return of 133%.
As for Egypt’s dollar bonds, it is another story, as foreign currency debt bears the brunt of the risks from the rise in the yield of treasury bonds and state deficits, and after it lost 8% last year, investors are now demanding an additional premium to carry Egypt’s dollar debt, which currently stands at 578 basis points, i.e. Similar to Iraq but higher than Gabon and Pakistan.
real benefit
However, the country’s local currency-denominated bonds deviate from the global negative yield trend, given that inflation is still below the central bank’s target level, and what is known as the real interest – the difference between deposit interest and inflation – in Egypt stands at 2.35%, compared to negative 6.55% in the United States. United.
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Jim Barineau, director of emerging market debt at Schroders in New York, said: “With the real interest rate being this high, we do not believe that the Fed’s modest increases this year will be a major driver for Egyptian bonds… The ability to keep inflation relatively under control was a factor. decisive.”
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