The bond market in the United States, whether sovereign or corporate, isn’t worth getting into. Yields have collapsed under pressure of quantitative easing, and fixed income investors are left searching around the world for high yield. High yield means high risk, but in Africa high risk doesn’t necessarily mean high reward.
A Reuters report on the burgeoning African bond market highlights some of the issues on the continent. Yields on debt maturing in 2017 issued by Gabon, a country few have heard of, and fewer still know anything about, have been cut in have in the last eighteen months to 3.3 percent. This, as Tim McLaughlin at Reuters points out, is just a 248 bps spread on five year Treasury Bills.
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When money flows into a bond market, yields fall. Gabon is not the kind of country that should be able to offer bonds that yield just 3.3 percent. The country is just three years out from under the kleptocratic regime of Omar Bongo, and though it seems stable right now, that yield does not effectively present the risks inherent in the country’s debt. The country is currently led by Bongo’s son, Ali Bongo.
Explosion of Interest in African Bonds:
There hasn’t been an explosion of interest in Gabon bonds, however, there has been an explosion of interest in the bonds of countries across Africa. Rwanda, with its genocide still within memory of many children, offered $400 million in debt earlier in 2013, and investors, according to Reuters, were looking to buy much much more.
African governments, assuming they’re on to a good thing, are looking to pile on debt at low yields. This means that Gabon is planning to issue more debt this year than it has in the last five combined. The country offered a $1 billion offering back in 2007, and it’s been late twice with payments on that sum.
We’ve looked at the African bond issue issue before here at Valuewalk, and the end game doesn’t look particularly good. Investors are putting a lot of money at high risk for relatively low yield, which can’t be good for the market as a whole. If a problem erupts in one country, it’s likely to begin a domino cascade effect.
Quantitative easing may be necessary to keep the U.S. economy afloat right now, and it’s certainly doing good things for the stock market, but fixed income investors are putting themselves in danger, and African economies may be forging new chains to restrict growth.