Sat. Jan 22nd, 2022

JPMorgan Chase will add Egypt to a group of indices, which set up the market to receive an inflow of cash from passive money managers.

By Bloomberg

Egypt’s red-hot bond market has made it a favorite of investors in emerging markets, and they are counting on another year of huge profits.

JPMorgan Chase & Co. Egypt – which has $ 26 billion worth of qualifying government bonds – will join a group of indices this month, preparing the market to receive an influx of cash from passive money managers. Investors have already been lured by Egypt’s solid interest rates, which have been adjusted for inflation as the highest in the world.

With global bond markets faltering in losses as the Federal Reserve falcons, Egypt looks like a bright spot for investors. Local bonds have yielded 1.7% since December, making them one of only a handful of emerging markets to deliver a positive performance.

PineBridge Investments and Renaissance Capital say they expect strong performance to continue and predict double-digit gains in 2022 – contributing to last year’s return of 13%, which was the second best in the world and compared to an average loss of 1.2 % for local emerging market debt.

Chart comparing Egypt's real interest rates with other emerging markets

Local currency bonds of the North African nation could yield 17% this year, according to Anders Faergemann, a money manager at PineBridge in London.

“The disinflation process is still intact and the exchange rate is being valued fairly,” he said.

In the long run, Egypt’s bond market record is even better. Its local bonds have yielded 156% in dollar value over the past five years, as reforms have attracted inflows under agreements with the International Monetary Fund and funding from Arab Gulf allies. This compares with 26% for Bloomberg’s emerging markets index and even beats the S&P 500 index, which returned 133%.

Its dollar effects are a different story, with debt in hard currencies bearing the greatest risk of rising treasury yields and the country’s deficits. After investors lost 8% last year, investors are now demanding an extra premium to keep Egypt’s dollar debt – which is 593 basis points similar to Iraq and higher than Gabon and Pakistan.

Real Rates

However, the country’s local currency effects resist the global trend of negative returns, as inflation remains below central bank rates. Egypt’s so-called real interest rate – the difference between its deposit rate and inflation – is 2.35%, compared to a negative 6.55% for the US

“With real rates so high, we do not think the Fed raising rates modestly this year will be a key driver for Egyptian bonds,” said Jim Barrineau, New York-based head of emerging market debt at Schroders. “The ability to keep inflation relatively limited was key.”

(Add qualifying effects in 2nd paragraph, update numbers throughout)

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