Check out this scenario: by close of 2017, the (older) 10-year Eurobond had risen to a new high, with the yield dropping to 5.67 per cent, down from 7.81 per cent in 2016.
The recent 10-year Eurobond also hit a new high, with the yield dropping to 7.11 per cent from its opening 7.25 per cent. Note: Bond prices and yields have an inverse relationship. When yields rise, bonds prices fall and vice versa.
The big question is; whom do we believe and whom do we believe not? Who’s saying the truth? And who’s going to win the war?
This is a tough call. But since no one sees the future, it’s futile to attempt. Instead, let’s turn our focus elsewhere. Let’s try to separate what the bonds outperformance is and what it isn’t.
And here there are two positions; the experts and the markets. This statement by Moody’s Investor Service aptly captures the view held by most economic experts regarding the country’s financial position.
Commenting on its recent downgrade of Kenyan Government bonds, the rating agency had this to say; “the drivers of the downgrade relate to an erosion of fiscal and rising liquidity risks…….the fiscal outlook is weakening with a rise in debt levels and deterioration in debt affordability that Moody’s expects to continue.” Put ifferently, Kenyan treasury Bonds are no safe-house.
On the other hand, a different story is being told inside the markets. That Kenya has the attraction of high-yields, political stability and an improving economy (recent PMI survey findings show an increase in business to the highest level since April 2016). In other words, the idea that Eurobonds are pricing in growth and stability is being viewed as true.
Moreover, players see yield-hungry international investors increasingly responsible for lower yields. Yield-chasers are turning to emerging/frontier market bonds as most developed markets still offer low/negative yields.
And since Africa (a frontier destination) is giving the highest sovereign Eurobond yields in the world (six per cent on average), investor interest remains high.
Oversubscriptions are the norm. So far this year,