Betting on the Fed rate cut, Wall Street turns its focus to high-yield bonds in Africa

With the expectation of a rate cut by the Federal Reserve, high-yield foreign currency bonds in some African countries are becoming profitable, attracting investors' attention.

These countries include Nigeria, Gabon, and Kenya. Danske Bank analyst Mørch believes that the bond pricing in these three countries is incorrect, leaving room for further increase.

The economies of these three countries are recovering, with Nigeria showing significant growth in oil production and foreign exchange reserves, Gabon's oil production offsetting political uncertainty, and Kenya's economic diversification also being attractive.

As the expectation of a rate cut by the Federal Reserve heats up, global liquidity is increasing. Analysts believe that the political instability in these African countries has made investors cautious about their economic prospects, leading to the undervaluation of these countries' bonds.

These country bonds have risen significantly but still have room for further increase

Traders believe that despite the economic recovery in these three African countries, their bond performance has been relatively poor, lagging behind both emerging and frontier markets, with the spread against US Treasury bonds widening.

In the past month, in the Bloomberg Dollar-denominated Sovereign Bond Index, Gabon's bonds fell by 1.2%, Nigeria's bonds fell by 0.5%, and although Kenya's bonds rose by 1.1%, they still lagged behind the index's average return of 2.5%.

However, this situation is quietly changing. With the expectation of a rate cut by the Federal Reserve heating up, the performance of these bonds has improved, reigniting investors' interest in them. During this period, Gabon's bonds ranked third in performance, behind only Ecuador and Argentina.

Some investment managers believe that although these bonds have risen significantly, they still have room for further increase.

Thalia Petousis, portfolio manager at Allan Gray in Cape Town, said, "Many African Eurobonds have risen significantly this year, which may limit further gains for most frontier bonds on the African continent."

Danske Bank believes that Nigeria's bonds are very attractive. As Africa's largest oil-producing country, Nigeria's oil production continues to grow, with the country's crude oil and condensate production rising to 1.75 million barrels per day in August. The state-owned Nigerian National Petroleum Corporation predicts that production will increase to nearly 2 million barrels per day by the end of the year. This provides strong support for its economy. The country's foreign exchange reserves have also reached $36.5 billion, the highest level in over a year.

Furthermore, Gabon's oil production is at multi-year highs, which should support its bond prices, but in reality, the yields remain high. Analysts believe that Gabon's bonds are undervalued by the market, and their value has not been fully reflected.

Mark Bohlund, Senior Credit Research Analyst at REDD Intelligence, believes that the main reason for this phenomenon is the political instability in Gabon, with unclear military government spending plans, making investors cautious about Gabon's economic prospects.

Kevin Daly, portfolio manager at Abrdn Investments Ltd. in London, said, "High-yield countries in Africa typically benefit from the Federal Reserve's loose policy, and high beta countries such as Nigeria, Kenya, and Angola may perform well in the region Benin, Cameroon, Côte d'Ivoire, Angola, and Senegal are also considered attractive countries