Nigeria is set to regain a place in a major J.P. Morgan government bond index, with the country assigned a 7.4 per cent weighting in a new benchmark targeting local-currency debt across frontier markets.
The new index, known as the Government Bond Index–Emerging Markets Edge (GBI-EM Edge), is expected to be launched by the end of September, according to Reuters.
The benchmark will track an estimated $330 billion in local-currency government bonds across 26 countries, placing Nigeria among its major constituents alongside Egypt, Vietnam, Morocco, Kazakhstan, Bangladesh, Pakistan and Sri Lanka.
J.P. Morgan has set a maximum country weighting of 8 per cent, meaning Nigeria's proposed 7.4 per cent allocation would place it close to the upper limit and make it one of the largest markets in the index.
The development marks a potential return to greater international visibility for Nigeria's domestic debt market, almost 11 years after the country was removed from J.P. Morgan's GBI-EM in 2015.
Inclusion in the new benchmark could make Nigerian government securities more attractive to global fixed-income investors, particularly funds that use bond indices as benchmarks for asset allocation.
J.P. Morgan has reportedly been developing the index for several years amid increasing investor interest in higher-yielding government debt in frontier markets.
The index is expected to comprise government bonds with a minimum equivalent value of $250 million and at least 2.5 years remaining to maturity.
African markets are projected to account for nearly 45 per cent of the benchmark, while frontier markets in Asia are expected to contribute almost one-third of its composition.
According to Reuters, the index is projected to have an average nominal yield of about 10.4 per cent, approximately 440 basis points above J.P. Morgan's mainstream emerging-market local-currency index.
Back-testing indicated that the new benchmark would have generated returns about 1.2 percentage points higher than the mainstream emerging-market local-currency index since the end of 2017.
Bond indices are closely monitored by international fund managers, as they provide benchmarks that guide investment decisions and allocation of funds across different markets.
Nigeria's proposed inclusion follows earlier efforts by the Federal Government to regain access to major international bond benchmarks.
The government had, in recent months, disclosed that it was engaging J.P. Morgan over the country's possible re-entry into its government bond index for emerging markets.
The proposed 7.4 per cent weighting could therefore provide another channel for Nigeria to attract foreign portfolio investment into its domestic government securities market, while strengthening the country's profile among international fixed-income investors.
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