(Bloomberg) -- Investors are eyeing high-yield foreign currency bonds from Nigeria, Gabon, and Kenya ahead of an anticipated US Federal Reserve rate cut in September, seeing some of these debt securities as being mispriced and having scope to rally further.
The three African nations are recovering: Nigeria’s rising oil output and growing foreign exchange reserves are bolstering the economy; Gabon’s high oil production is offsetting political uncertainties; and Kenya’s diversified economy remains attractive even amid recent tax-related riots.
Despite this, these countries have seen spreads over US Treasuries widen, leaving room for potential tightening. Over the past month, bonds from all three have underperformed their emerging- and frontier-market peers in a Bloomberg index of dollar-denominated sovereign bonds. Gabon’s bonds lost 1.2% and Nigeria’s dropped 0.5%. While Kenya’s gained 1.1%, that still lagged the average 2.5% return of securities in the index.
Now the market may be turning. In the past week, these bonds have outperformed amid a risk rally fueled by signs the Fed will ease policy next month. Gabon’s bonds were the third best performers during that period, behind only Ecuador and Argentina.
“Many African Eurobonds have already rallied strongly this year,” which could limit further gains for most of the continent’s frontier bonds, according to Thalia Petousis, a Cape Town-based portfolio manager at Allan Gray. “But investors are still using discernment around the underlying fundamentals,” she added, pointing to opportunities in Kenya after unrest, which started in June, shook prices.
For Danske Bank, Nigeria “looks very attractive, with higher FX reserves, rising oil production and continued reforms - despite the riots spreading from Kenya,” Søren Mørch, a portfolio manager at the bank, said.
Nigeria, Africa’s largest crude producer, saw its oil output rise to 1.75 million barrels per day of crude and condensates in August, with state-owned Nigeria National Petroleum Corp. forecasting that output will rise near two million barrels a day by year end. The country’s foreign exchange reserves at $36.5 billion are at their highest level in more than a year.
Yield Outlook
Nigeria has a potential for eurobond yields to tighten, said Mark Bohlund, a senior credit research analyst at REDD Intelligence. “The external accounts are also in a relatively strong state, but uncertainty over economic policymaking is still high,” Bohlund said.
Bohlund is also bullish on Gabon, where yields don’t reflect oil output being at multi-year highs. “The yields largely reflect uncertainty about the spending plans of the current military junta, heavily influenced by the very negative International Monetary Fund report released in May,” he said. Gabon’s 2025 eurobond traded at a yield 17.77% as of 3:45 p.m. on Aug. 21.
“Gabon, we think, is misunderstood and bonds are very attractive,” according to Danske Bank’s Mørch. “However, visibility is also low.” He said Benin, Cameroon, Ivory Coast, Angola and Senegal are other countries also considered attractive.
For Kevin Daly, portfolio manager at London-based Abrdn Investments Ltd., “African high yielders will generally benefit from Fed easing, with high beta names such as Nigeria, Kenya and Angola likely outperforming in the region.”
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