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Wealth Management

The price of relief

The bond markets continue to thrive, including in riskier segments such as emerging markets. The return of Sub-Saharan African countries like the Ivory Coast, Benin, and more recently Kenya, has been warmly welcomed by the markets. Our senior bond analyst Catherine Reichlin analyses the current situation in her latest Bond Moment video.

The return of risk appetite is not loosing traction, and even sectors shunned by investors over the past two years are benefiting! This is evidenced by the attractiveness of new issuance in speculative-grade emerging markets: $12.5bn has been issued so far this year, 60% more than at the same point in 2023.

The risk premium on speculative-grade EM sovereign debt has fallen sharply: controlled inflation, expectations of interest rate cuts, a return of confidence and the likelihood of averting recession are fueling this return to optimism. Inflows into emerging market debt funds, the highest since April, also illustrate this phenomenon. The same is true of new bond issuance by sub-Saharan African countries, after an absence of almost two years.

At the end of January, Ivory Coast led the way with two bonds maturing in 9 and 13 years. The response was strong, with order books totalling $8bn for an issue of $2.6bn. Benin followed with a $750m issue maturing in 14 years: the country raised $5bn in interest! These two countries issued at single-digit yields of 7.625%, 8.25% and 7.96% respectively.

The market's resilience continued on 12 February with the return of Kenya. The country, rated B on negative watch, is supported by the IMF. Its ability to refinance its June 2024 bond has been called into question, and the yield on the latter rose above 21.8% in October when the risk premium for African countries calculated by JP Morgan exceeded 1,000bp. The more favourable context encouraged Kenya to try its luck with a 7-year bond, the proceeds of which will be used to finance the redemption of the June bond.

The country had planned to issue $1bn and expected to pay a yield of close to 11%, but with order books topping $5bn, the country issued $1.5bn of debt with a yield of 10.375% and a coupon of 9.75%. This is the highest coupon paid by an African country in 2024, so the interest burden will increase because the coupon on the June issue is 6.875%. But Kenya has chosen to pay the price in order to reassure the market, alleviate the immediate pressure on its refinancing needs and buy itself some time by extending the average maturity of its debt. The decision was welcomed by the market: once the plan was announced, the yield on the June 2024 maturity fell from 17% to 11%, and is now trading at 9.3%!

The relief will not allow the country to avoid reforms to strengthen its ability to repay its debt, but it does speak volumes about the market's appetite. According to forecasts by Goldman Sachs, the countries of sub-Saharan Africa should issue $4.5 billion this year. The ball is already rolling, and while the risk levels vary from country to country, investors looking for yield will find something for every appetite.

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