Investors cautioned to go easy on African Eurobonds

Such is the demand for African Eurobonds these days that not even army mutinies are scaring investors. That may not be the case for much longer.

Investors have become “battle-hardened” in their quest for yield, according to Union Bancaire Privee Ubp SA, with issuance from the continent reaching $12.7 billion in 2017, already a full-year record. Less than a month after soldiers rebelled in Ivory Coast, the West African nation attracted $10 billion of orders in a sale of $2 billion of securities on June 8, while Egypt and Senegal drew around $20 billion between them for deals in May.

Risky assets

For investors inured to the continent’s political risks, the boom may soon be over, according to Standard Bank Group Ltd, which recommends bondholders start reducing their overweight African exposure. The market may turn as the Federal Reserve raises rates, driving US Treasury yields higher and reversing flows to risky assets.

“The bull market is living on borrowed time,” Dmitry Shishkin, an analyst at Standard Bank in London, said in a note to clients on June 12.

“We probably still have a few weeks, if not a couple of months, during which US Treasury weakness is likely to be limited.”

However, we think we should slowly start preparing for that eventuality.” While African yields soared on US President Donald Trump’s surprise election victory in November, they have since plummeted 140 basis to around the lowest since Aug. 2015, according to Standard Bank indexes.

Still, the average rate of 6.23 per cent for African government debt is almost 100 basis points more than what investors get for the riskiest emerging-market sovereign notes, according to data compiled by Bloomberg.