JPMorgan Moves To Add Frontier Local Bonds To Its Index Suite

JPMorgan is finalising plans to launch a new index that will track local currency bonds issued by frontier market governments. It marks its first major push into this segment in over a decade.

The move comes as global investors hunt for higher yields amid a prolonged slide in the US dollar and sharp rallies in several high-risk markets. These include Argentina, Ecuador, and Uganda. Fund managers said the discussions with JPMorgan gathered pace in the second half of last year and have now reached an advanced stage.

No Comments From JP Morgan

JP Morgan declined to comment on the development. Note that it last entered frontier space 15 years ago, when it launched the NEXGEM index. It tracked hard-currency bonds. The new index will focus on local currency debt.

Countries And Weight Limits

According to three fund managers familiar with the talks, the proposed index is likely to include between 20 and 25 countries. Egypt, Vietnam, Kenya, Morocco, Kazakhstan, Pakistan, Nigeria, Sri Lanka, and Bangladesh are expected to carry the largest weights.

One source said JPMorgan plans to cap individual country weightings at 8%, while another said an earlier consultation paper had proposed a higher cap of 10%. Final limits are still under discussion.

The index is also expected to include only bonds with a minimum size of $250 million or equivalent. That requirement could complicate the inclusion of Zambia, which several investors want in the index but which has historically issued smaller bond tranches.

A Growing Market

Frontier market local currency debt has grown sharply over the past decade. As per estimates, tradable outstanding debt has tripled to about $1 trillion.

Despite that growth, benchmark options remain limited. FTSE Russell introduced a similar frontier local currency index in 2021. However, JPMorgan’s indices generally carry greater weight among emerging market investors.

Many global funds use JPMorgan benchmarks to construct portfolios and assess performance. That influence means the launch of a new index could quickly translate into real capital flows into the underlying bond markets.

Yield Premium

JPMorgan estimated in September that the proposed index would offer a yield pick-up of 400 basis points or more over its flagship GBI-EM emerging market local currency index. More than 60% of the index constituents are expected to yield above 10%.

Market And Investor Impact

The index could bring fresh inflows in bond markets. For investors, it could be a new way to access higher yields. They can also get currency exposure in smaller economies. For issuers, inclusion in the index may lower borrowing costs. It can also encourage larger, more regular bond sales in local currencies.

Sources:

Tradingview

Businessday