JPMorgan is preparing to launch a new frontier-market local-currency government bond index by the end of September, creating a benchmark for nearly $330 billion of debt across 26 developing economies, according to Reuters.
The new benchmark, called the GBI-EM Edge, will expand JPMorgan’s emerging-market index franchise into local-currency debt issued by smaller frontier economies.
The launch comes nearly two decades after JPMorgan introduced its hard-currency NEXGEM frontier-market index.
Countries expected to have some of the largest weights in the new index include Egypt, Vietnam, Morocco, Kazakhstan, Bangladesh, Pakistan, Nigeria and Sri Lanka.
Several of those markets have experienced significant rallies in recent years following periods of economic or financial stress.
The index will include government bonds from 26 countries ranging from Albania to Zambia.
Individual country weights will be capped at 8%, limiting the influence any single market can have on overall index performance.
To qualify, bonds must have an equivalent value of at least $250 million and at least 2.5 years remaining until maturity.
African markets are expected to account for almost 45% of the benchmark.
Frontier Asian markets, particularly Vietnam, Kazakhstan, Pakistan and Bangladesh, will represent nearly one-third of the index, with each of those four countries expected to receive the maximum 8% weighting.
The launch could have meaningful implications for the countries included because widely followed bond indexes can influence international capital flows.
Asset managers frequently use JPMorgan’s emerging-market benchmarks to measure performance and structure portfolios, which means inclusion can increase a country’s visibility among global fixed-income investors.
JPMorgan has reportedly spent years developing the new benchmark as investor demand for higher-yielding frontier-market debt has increased.
Local-currency debt also gives investors exposure to both government bond yields and movements in the issuing country’s currency.
The GBI-EM Edge is expected to have a nominal yield of approximately 10.4%.
That is about 440 basis points above JPMorgan’s mainstream emerging-market local-currency bond index.
Historical back-testing showed that the new frontier benchmark would have generated annualized returns approximately 1.2 percentage points higher over the past nine years.
The development comes as the overall market for tradable local-currency emerging-market debt has expanded substantially.
Analysts estimate the market has tripled over the past decade to approximately $1 trillion.
The GBI-EM Edge will therefore track close to one-third of that estimated market.
For frontier economies, deeper local-currency bond markets can also have broader financial benefits.
Governments that rely heavily on U.S. dollar-denominated debt can become vulnerable when their domestic currencies weaken because the local-currency cost of repaying dollar obligations increases.
Developing deeper domestic debt markets can allow governments to finance more of their borrowing in their own currencies and potentially reduce that mismatch.
The World Bank estimates frontier economies account for approximately one-fifth of the world’s population but only about 3.1% of global capital flows and less than 5% of global GDP.
Their populations are expected to increase by around 800 million during the next 25 years, potentially increasing their importance within the global economy.
Some countries are already modifying their domestic bond markets partly in anticipation of increased international investor interest.
Angola, which will be included in the new benchmark, has been working to open its approximately $18.6 billion domestic bond market more broadly to international investors.
Zambia will also be included despite earlier concerns that its available bonds might not meet JPMorgan’s $250 million minimum size requirement.
Efforts to increase the size of Zambia’s bonds allowed the country to qualify for the benchmark.
JPMorgan’s move also increases competition in frontier-market indexing.
FTSE Russell has offered a comparable benchmark since 2021, but JPMorgan’s emerging-market indexes are particularly influential among global asset managers and are frequently used as benchmarks for actively managed and passive investment strategies.
The launch of the GBI-EM Edge could therefore help draw additional institutional attention to local-currency government debt markets that historically have received relatively limited allocations from international investors.
