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The quick collapse and rise again of Eurobonds returns

Returns on Eurobonds have shown a remarkable rally during the coronavirus scourge.
Returns on Eurobonds have shown a remarkable rally during the coronavirus scourge. FILE PHOTO | NMG 

The reversal is here. The bear run on Kenyan Eurobonds appears to have completely traced back its move with three maturities scoring big gains.

As at the end of last week, the yield on the 2014 note had dropped to 6.3 percent - around 430 basis points lower from its six-month high of 10.5 percent.

The 10-year (2018 note) has also dropped 400 basis points to stand at 7.2 percent— its lowest since February 2020 – while the 30-year Eurobond yield closed at 8.3 percent down by 2.5 percentage points in the same period.

Bond prices rise as yields fall.

Some history is important. Just as the Covid-19 pandemic set in, most investors chose to hold US treasuries at completely depressed levels and even negative German Bunds rather than hold high yielding emerging market Eurobonds.

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Besides, retreating global equities also spurred inflows into haven assets. Obviously, there was a need to digest the news about the growing pandemic.

Consequently, at that time, yields on the Kenyan seven-and-12-year bonds, for instance, jumped to nearly 11 percent from sub-seven within days.

Nigeria’s 2031 Eurobond nearly doubled to 12.1 percent from 6.8 percent in February while Ghana’s 2029 issue saw its yield rise from 6.8 percent to 10.9 percent. But it seems that was not to last long.

It’s possible that as it became apparent global economies were likely to face lower (or negative) growth rates for the foreseeable future, this may have sparked some thinking.

With the 10-year German government bond rate standing at negative 0.45 percent and its equivalent US 10-year yield at less than one percent, holding these assets wasn’t sustainable for some of the portfolios.

It is estimated that about Sh1.5 quadrillion ($15 trillion) of government bonds worldwide now trade at negative yields. It was only a matter of time before international investors trooped back in. They did. Most are back into buying mode.

What does that mean going forward?

As global policy makers slash interest rates at the fastest rates since the financial crisis (more than 25 cuts since the start of 2019 according to Deutsche Bank), low rates will most likely keep investors in a risk-taking mood.

With no hint that inflation is going to pick up (and therefore global central banks expected to stay on hold), emerging Eurobonds could possibly return to pre-covid-19 levels at worse, stay range-bound for the remainder of the year.

Additionally, with global stock markets sliding as tensions between the US and China reach new highs, and as more evidence emerges that the US economy is struggling to recover from the coronavirus pandemic, it seems emerging bonds will remain the odd-beneficiary for some time.

The rally says that those (read governments) who need access to capital can get it. It also speaks of a shift in risk sentiment – the pandemic and muted economic growth notwithstanding; players are unhinged and are ready to chase yield.

Of course, no one has a clear path of the future, but clearly, demand for the risky-side of the Eurobond market is set to continue to feed on assets such as Kenyan Eurobonds.

Mwanyasi is MD, Canaan Capital Ltd

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