Kazakhstan to Receive Maximum Weight in New JPMorgan Bond Index

Kazakhstan will receive the maximum 8% country weight in JPMorgan’s new index for frontier market government bonds, creating an opportunity to attract new foreign buyers of tenge-denominated debt. JPMorgan plans to launch the GBI-EM Edge by the end of September. The maximum weight for any single country is capped at 8%, and Kazakhstan will receive the full quota. Vietnam, Pakistan, and Bangladesh will have the same weight. Other major components will include Egypt, Morocco, Nigeria, and Sri Lanka. The index will cover 26 countries, with nearly $330 billion in bonds eligible for inclusion. GBI-EM Edge is designed for frontier markets, relatively less accessible markets outside JPMorgan’s main emerging market benchmark. Inclusion is a separate development from Kazakhstan’s efforts to join that main index. The index will serve as a benchmark for international asset managers. Some funds seek to replicate its composition, while others use it to compare the performance of their own portfolios. A country’s weight can therefore influence how much money investors allocate to its bonds. However, the nearly $330 billion represents the value of bonds eligible for the GBI-EM Edge, not the amount of future investment. JPMorgan has not yet said how much capital will directly track the new index. That will largely determine how significant the additional demand for Kazakh debt may be. Foreign Investors Have Already Increased Their Holdings Foreign investors began actively buying Kazakhstan’s government debt even before JPMorgan’s decision. According to the Analytical Center of the Association of Financiers of Kazakhstan (AFK), non-resident holdings of government securities reached KZT 2.5 trillion, or about $5.4 billion, by the end of June. During the first half of the year, their portfolio grew by 28.3%, while the share of non-residents in the government securities market increased from 6.2% to 6.9%. In June alone, foreign investors added KZT 185.1 billion, or about $400 million. Just a year and a half earlier, non-resident holdings stood at around KZT 1.1 trillion, or about $2.4 billion. Kazakhstan has maintained a high base rate to combat inflation. This has also kept yields on government bonds high. According to AFK, real yields on government securities – meaning returns above inflation – ranged from 5.7% to 7.4% in the first half of the year. The association’s analysts also linked strong demand to expectations of a gradual reduction in the base rate. For a foreign fund, the trade can look attractive: raise money in a market with lower interest rates, buy tenge, and invest in Kazakh government bonds. If the tenge remains stable or strengthens, the investor benefits both from the high interest rate and from the currency movement. If the tenge falls, some of that return disappears when the investment is converted back into dollars. The tenge’s appreciation has already helped foreign bondholders. It strengthened by 2.6% during August, ending the month at KZT 461.57 per dollar, according to the National Bank. AFK points to another effect of foreign purchases. To buy the bonds, non-residents sell foreign currency and purchase tenge, increasing the supply...