It has been a happy time for investors in Emerging Market (EM) government bonds with a gain of 27% over the last two years. The engine behind this was the high yield segment of the index, mostly made up of Frontier Market (FM) bonds, which rose 36%. We see the same story over 3 years: the high yield component of the JPM Emerging Market Bond Index rose over 50%, while the rest gained just 14%.
The problem for today’s index-dazzled investor is that passive strategies don’t suit investing in FM bonds. FM bonds also come with plenty of risk. To navigate this a custom approach based on understanding the individual economies is a must. Here’s why.
FM bonds, even if issued in hard currency like dollars or euros, are less liquid than EM bonds. The bid/offer spread on a bond indicates just how illiquid – the bigger the spread the more illiquid the bond. A typical emerging market bond like the South African sovereign USD Eurobond maturing in 2032 normally has a spread between 25-30 basis points. Contrast this with the (frontier market) Nigeria Eurobond 2032 which has a spread of 35-50 basis points (bps). In the bond sell-off in early April 2025 the South African bond spread stayed at 30bps, while the spread on Nigeria’s 2032 Eurobonds surged to 60bps.
When issued in local currencies, FM bonds are even more illiquid. And the problem is complicated by the availability of foreign exchange (FX). A $30m bond trade can have a big impact on the FX rate if, say as in Zambia or Gabon the daily FX volume is $25-50m. It is not so much of a problem in, say, Kazakhstan which has a daily FX volume of $200m.
How do investors get at the fundamentals of which FM bonds to buy? Again there is no one-size-fits-all solution – a tailored approach is needed. All FM countries are different, and there simply aren’t datasets going back 30-40 or 100 years, as there are with developed countries. You have to find ways to make up for this lack of past data. That means understanding how the economy works by gauging where the government’s revenue comes from; and the country’s export/import reliance. Island nations, for example, are burdened with very sticky imports as they produce little domestically. Another factor may be how core commodity exports impact the economy. For Angola that will be the oil price – its major export. Quite different from a commodity importer like Pakistan or Kenya.
Investors need a tested approach that is tailored to each of these markets. But it must be flexible. Take Ghana, historically an oil exporting country reliant on the oil price. But today gold and cocoa are more important exports. Ghana’s oil production is so low that it is importing oil, so unlike in the past lower oil prices now help the country’s current account.
And then there is political risk. The election outcome in Ivory Coast in 2010 led to a civil war with the outgoing president Gbagbo forcefully removed. That led to a chain of events culminating in Ivory Coast defaulting on a $29m interest payment on its Eurobonds that was due in December 2010. The country did eventually come to an agreement on making up for the missing coupon, but in the meantime investors had to undergo alarming volatility in its bond prices.
Likewise there are factors that, surprisingly, don’t have huge impact. In the face of big worries about US tariffs, plenty of frontier countries have limited exposure to the US. Kenya’s exports to the US last year were just $771m, for an economy sized at $113-116bn.
Then there is the default question. FM countries certainly have more risk of default. This is reflected in their credit ratings, and higher yields on their bonds. So investors are at least paid for that risk. And of course Greece’s default in 2015 reminds us that defaults happen in EM countries and Investment Grade countries as well (albeit rating agencies swiftly downgrade the rating when that happens).
An FM country that has defaulted is also, paradoxically, an opportunity. When a creditors committee is formed to represent bondholders, it normally includes the largest investors. But not all. Some money managers prefer not be involved for whatever reason – fear of publicity, lack of restructuring experience. That means those voices are not heard, but those present are. That leads to information asymmetry. Investors ‘in the room’ enjoy a current understanding of the situation, insight into the thinking of people involved, as well as a sense of timing and what the eventual restructuring may look like.
Another way default-followed-by-restructuring opens doors is it allows a country to adjust its debt servicing back to a sustainable level and paves the way to accessing international bond markets again, as Jamaica did following its default in 2013, and Cyprus or Greece did in 2012. In 2024 some of the best performing investments were distressed bonds being restructured. Lebanese sovereign Eurobonds jumped from 13 cents in January 2025 to 23 cents in September 2025 – a 77% return in 9 months.
Thankfully (for those with the inclination and resources), not all EM investors have the capacity to take advantage of the performance that is on offer from FM bonds. But those that do, do.
