JPMorgan is finalizing plans to create an index for frontier market local-currency sovereign debt, investor sources who took part in consultations said, as the bank seeks to meet rising demand for more diversified and higher-yielding fixed income exposure.
The proposed benchmark follows the bank’s earlier hard-currency frontier offering launched 15 years ago. Conversations with several leading asset managers reached an advanced stage in the latter half of last year, according to six money managers who discussed the matter on condition of anonymity.
Under the structure being discussed, the index would include roughly 20 to 25 countries. Three of the managers involved in the consultations said the largest weightings would fall to a group of economies including Egypt, Vietnam, Kenya, Morocco, Kazakhstan, Pakistan, Nigeria, Sri Lanka and Bangladesh.
Design features under consideration include a minimum bond size and a cap on any single country’s weighting. One source said the tentative plan would exclude bonds smaller than the equivalent of $250 million, a threshold that has raised questions about including countries that historically issue smaller parcels of debt, such as Zambia. Another participant noted there would be a limit that prevents any one country holding more than 8 percent of the index, while a different source said an earlier consultation draft proposed a 10 percent ceiling.
Questions over eligibility extend beyond size. The index is set to adopt a maturity requirement similar to JPMorgan’s GBI-EM gauge for larger emerging markets, with included bonds required to have more than 2.5 years to maturity. That mirrors existing practice for major emerging market local-currency benchmarks and helps define the investable universe for long-duration local debt.
Sources involved in the consultations outlined a tentative timetable. One senior fund manager said they expected JPMorgan to present a formal structure around June, with an opportunity for final comments, and that a formal launch could follow next year. Another senior manager suggested an initial announcement could arrive as early as the end of March, which could accelerate a formal launch date.
Market participants noted existing industry precedents. An equivalent frontier local-currency index has been available from FTSE Russell since 2021, but JPMorgan’s indices have historically been widely used by emerging market managers as the basis for funds and for performance measurement. That prominence makes the potential new benchmark particularly relevant for portfolio construction across the sector.
Estimates from asset managers show the tradable universe of local-currency sovereign debt has expanded substantially. One analysis cited by the consulted investors put tradable local-currency debt at approximately $1 trillion, a threefold increase over the last decade. That same analysis indicated frontier market local-currency debt outperformed JPMorgan’s mainstream emerging market local currency index by almost 2.5 percentage points over the past eight years and also exceeded returns from broader emerging market dollar bond indices.
Some investors see that track record as evidence that frontier market credit and economic growth have been underappreciated by global investors. The planning for a new benchmark arrives as the dollar has declined over the past year and some frontier currencies and bond markets have experienced notable rallies, with examples cited by investors including Argentina, Ecuador and Uganda.
Proponents of deepening local-currency bond markets argue that greater development of these markets can help lower the risk of debt crises tied to currency collapses, an objective advanced by international financial institutions. By providing a reliable benchmark and potentially expanding demand from global investors, a widely used index can support market liquidity and offer governments an alternative to borrowing in hard currency.
Practical issues remain. Zambia, for example, until recently typically issued local-currency bonds below the proposed $250 million threshold and therefore was initially left out of early outlines for the index. The country has since issued at least one larger local bond, creating the possibility it could meet the minimum size requirement.
Yield characteristics of the proposed index have also been discussed. JPMorgan’s own September estimate indicated the frontier local-currency index would offer roughly 400 basis points or more of excess yield compared with the GBI-EM index for larger emerging markets, and that more than 60 percent of constituents would yield in excess of 10 percent. Those potential yield advantages are a key rationale for investor interest.
Another structural consideration highlighted by sector participants is the potential promotion of some top-weighted frontier countries, such as Egypt and Nigeria, into the broader GBI-EM index in future reclassifications. Such movements would change the composition and risk-return profile of a frontier benchmark and could deter investors unless the criteria and transition mechanics are clearly defined.
"It will be important to nail that down," one senior fund manager said, underlining that clarity on migration rules and weight caps will influence investor willingness to adopt the index as a portfolio benchmark.
Contact and comment
JPMorgan declined to comment on the consultations and the substance of the proposed index, according to the market participants who described the discussions.