IMF Patients Top Bond Returns as Aviva Touts Froth-Free Bets

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  • Iraq, Mongolia, Cameroon generate top returns outside Americas
  • IMF role is especially important in frontier markets: Aviva

As the voices of caution grow amid the froth in emerging-market bonds, buyers are turning increasingly to nations whose lofty yields come with a safety net.

And they’re attracting the likes of Aviva Plc and BlueBay Asset Management LLP.

Iraq, Mongolia, Cameroon and Zambia have all been slapped with a label of fiscal weakness by seeking emergency funding from the International Monetary Fund. But the pledge of discipline and transparency that goes along with the aid has helped make their foreign bonds the top performers outside the Americas this year, Bank of America Merrill Lynch indexes show.

The uptick in sales from “less well-established” markets means that “IMF involvement is even more relevant in the investment decision-making process,” said Aaron Grehan, a London-based emerging-market fund manager at Aviva Investors, which has $450 billion under management. Grehan has overweight positions in IMF clients Jamaica, Ghana and Ukraine, as well as the five-year bonds of Egypt.

Persistently low rates in developed markets are pushing investors into ever-riskier wagers, driving average bond yields to a four-year low and triggering a cascade of debt sales by countries including triple-junk-rated Bahrain, and Tajikistan, a former Soviet republic that’s never placed a Eurobond. Struggling nations that have IMF oversight tempt investors because they’re more of a known quantity and subject to “relatively independent” reviews, BlueBay’s Stock said.

  • As of last week, Iraq had handed investors a 19.4 percent return on its foreign bonds in 2017, the most in BofA’s sovereign bond indexes outside the Americas. The country faces the “double shock” of Islamic State and low oil prices, the IMF said in a report last month. Iraq’s March 2023 dollar bonds climbed last week, lowering the yield one basis point to 6.34 percent.
  • Mongolia secured its $5.5 billion aid deal with the Washington-based lender after slumping commodity prices hobbled economic growth last year. Its bondholders earned 19.2 percent this year and yields on the nation’s 2024 notes have fallen 64 basis points this quarter.
  • Hit by a drop in commodity prices and attacks by Boko Haram, Cameroon secured a $666 million extended credit facility from the IMF in June. The yield on the West African nation’s November 2025 bonds dropped 12 basis points to 6.55 percent last week.
  • With a return of 16.5 percent, Zambia is fourth overall even as it struggles with ballooning deficits. Africa’s second-biggest copper producer is in talks for a $1.3 billion loan with the IMF. Its April 2024 dollar bond rose last week, reducing the yield eight basis points to 6.84 percent.

“If we’re confident that a country is going to reach an agreement with the IMF and the policies underpinning that agreement are going to be sound, then that is a very favorable backdrop,” said Graham Stock, the head of emerging-market sovereign research in London at BlueBay Asset Management in London, which has about $56 billion under management. Stock said he’s bought bonds of Mongolia and Egypt on the strength of the Washington-based lender’s support.

More on the bond splurge: Junk Issuers Happy to Oblige Yield Chasers as Costs Decline

Allianz Global Investors, which oversees $599 billion, made Egypt one of its top bond holdings after the country devalued its currency and launched an austerity program to win bailout funds from the IMF, said Shahzad Hasan, an emerging-market debt portfolio manager in London.

“The presence of the IMF in countries that have demonstrated sustained economic improvement presents the best opportunities,” Aviva’s Grehan said.

— With assistance by Srinivasan Sivabalan

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