Already hot Egyptian bond market could get even hotter | Business & Economic News

JPMorgan will include Egypt in a set of indexes, giving the market a flood of cash from passive money managers.

go through Bloomberg

Egypt’s red-hot bond market has made it a favorite among emerging-market investors who are banking on another year of big gains.

JPMorgan Chase & Co. will this month include Egypt, which has $26 billion in eligible government bonds, into a group of indexes, allowing the market to tap into a flood of cash from passive fund managers. Investors have been attracted by Egypt’s high interest rates, which are among the highest in the world after adjusting for inflation.

With the Fed turning hawkish and global bond markets suffering losses, Egypt looks like a bright spot for investors. Local bonds have returned 1.7% since December, making it one of the few emerging markets to have performed positively.

PineBridge Investments and Renaissance Capital said they expect the strong performance to continue and forecast double-digit gains in 2022 – adding to last year’s 13% return, the second-highest return in the world, compared with the local average Loss of 1.2% on emerging market debt.

Chart comparing real interest rates in Egypt with other emerging markets

Anders Faergemann, a fund manager at PineBridge in London, said the North African country’s local currency bonds could return 17 percent this year.

“The deflationary process remains intact and the exchange rate is properly valued,” he said.

Egypt’s bond market record will be better in the long run. Its local bonds have returned 156% in dollar terms over the past five years as a deal reform with the International Monetary Fund and financing from Gulf Arab allies have attracted inflows. By comparison, the Bloomberg Emerging Markets Index returned 26%, beating even the S&P 500, which returned 133%.

Its dollar bonds are another story, with hard currency debt bearing the brunt of the risks from rising Treasury yields and the country’s deficit. After falling 8% last year, investors are now demanding an additional premium for holding Egypt’s dollar debt — 593 basis points similar to Iraq’s and higher than Gabon and Pakistan.

real interest rate

Still, with inflation still below central bank rates, the country‚Äôs local currency bonds are bucking the trend and bucking the trend. Egypt’s so-called real interest rate — the difference between its deposit rate and inflation — is 2.35 percent, compared with minus 6.55 percent in the U.S.

“With real interest rates so high, we don’t think the Fed’s modest rate hikes this year will be the main driver for Egyptian bonds,” said Jim Barrineau, head of emerging markets debt at Schroders in New York. “The ability to keep inflation relatively manageable is key.”

(Add eligible bonds in paragraph 2 and update numbers throughout)