What JPMorgan's new frontier bond index means for Bangladesh
The most important potential benefit is greater visibility among international investors. Large global investment funds often use major bond indexes as benchmarks for deciding where and how much to invest.
JPMorgan is set to launch a new index tracking government bonds from 26 frontier-market countries, including Bangladesh. The index will cover nearly $330 billion worth of local-currency government debt. What does that mean for Bangladesh and international investors?
What is a bond?
A bond is essentially a way for a government to borrow money. When the Bangladesh government needs to borrow, it can issue government bonds.
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Investors buy those bonds and in return the government promises to pay interest and repay the principal when the bond matures. Bangladesh issues many of these bonds in taka. These are known as local-currency government bonds.
What is a bond index?
A bond index is a basket or list of bonds used as a benchmark to track the performance of a particular group of bonds or markets.
For example, an international investment fund looking to invest in frontier-market government bonds can use JPMorgan's index to see which countries and bonds are represented and how the market is performing.
JPMorgan is now creating a new benchmark specifically for local-currency government bonds from frontier markets.
What is a frontier market?
Financial markets are often broadly grouped into three categories: developed, emerging and frontier.
The US, UK and Japan, for example, have developed financial markets.
Countries such as India, Brazil and Indonesia are generally considered emerging markets.
Frontier markets are generally smaller and less-developed financial markets, with the potential for strong growth but also greater risks, less liquidity and less-developed financial infrastructure.
Bangladesh is classified as a frontier market in this context.
What exactly is JPMorgan doing?
JPMorgan is preparing to launch a new index called GBI-EM Edge by the end of September. It will track eligible local-currency government bonds from 26 frontier-market countries. The index will cover nearly $330 billion worth of debt.
This does not mean JPMorgan is investing $330 billion in these countries. Rather, the bonds represented by the index will have a combined value of nearly $330 billion.
Think of it as JPMorgan creating a global benchmark for a $330 billion pool of frontier-market government bonds.
Why is Bangladesh being included?
Bangladesh will be one of the 26 countries in the index. The countries expected to have the largest weightings include Bangladesh, Egypt, Vietnam, Morocco, Kazakhstan, Pakistan, Nigeria and Sri Lanka.
JPMorgan has capped the weighting of any individual country at 8%. Bangladesh is expected to receive the maximum 8% weighting. It means that, within this particular index, Bangladesh's eligible bonds can account for up to 8% of the index.
Why does this matter to Bangladesh?
The most important potential benefit is greater visibility among international investors. Large global investment funds often use major bond indexes as benchmarks for deciding where and how much to invest. Some funds also seek to replicate or track particular indexes.
Therefore, when Bangladeshi government bonds become part of a major international index, more global investors may start looking at Bangladesh's bond market. That could potentially lead to greater foreign participation in the domestic government-bond market.
But inclusion does not guarantee that foreign investors will pour money into Bangladesh. Investors will still consider Bangladesh's inflation, interest rates, exchange rate, economic outlook, market liquidity and policy risks before investing.
What does "local-currency debt" mean?
This is simply government debt issued in the country's own currency. For Bangladesh, a taka-denominated government bond is local-currency debt.
Suppose the government issues a bond for Tk10 billion. An investor buys it, the government pays interest and eventually returns the Tk10 billion when the bond matures. This is different from borrowing in US dollars or another foreign currency.
Why does borrowing in local currency matter?
Foreign-currency borrowing creates an additional risk for a government: exchange-rate movements.
Suppose Bangladesh borrows $1 billion when the exchange rate is Tk100 to the dollar. The debt was equivalent to Tk100 billion at that time. If the taka later weakens to Tk130 against the dollar, the same $1 billion debt would be equivalent to Tk130 billion.
So a weaker taka makes foreign-currency debt more expensive in local-currency terms. Local-currency borrowing avoids this particular exchange-rate risk for the government because it borrows and repays in taka.
The currency risk, however, does not disappear. It is largely shifted to the foreign investor, who is ultimately interested in the value of the investment in their own currency.
Why is JPMorgan launching the index?
There is growing interest among international investors in frontier markets because these markets can offer higher yields and potentially higher returns than more established markets.
According to Reuters, the new index has a nominal yield of almost 10.4%, around 440 basis points higher than JPMorgan's mainstream emerging-market local-currency bond index.
Higher yields can be attractive to investors. But they also reflect higher risks. Frontier markets can face greater currency volatility, lower liquidity and greater economic and policy uncertainty.
Which countries are in the index?
The 26 countries are: Albania, Angola, Bangladesh, Botswana, Côte d'Ivoire, Dominican Republic, Egypt, Georgia, Ghana, Jamaica, Jordan, Kazakhstan, Kenya, Morocco, Namibia, Niger, Nigeria, Pakistan, Paraguay, Senegal, Sri Lanka, Tunisia, Uganda, Uzbekistan, Vietnam and Zambia.
African countries will account for almost 45% of the index, while the Frontier Asia group -- mainly Vietnam, Kazakhstan, Pakistan and Bangladesh -- will account for nearly one-third.
What could it mean for Bangladeshi investors?
The index is primarily relevant to international investors and Bangladesh's government bond market, rather than being a new investment product for ordinary Bangladeshi savers. Greater international participation could potentially make Bangladesh's government-bond market deeper and more liquid. It could also encourage further development of the country's domestic capital market.
But it can work both ways. Once a country's bonds become part of a major global index, international investors also pay closer attention to its economic and financial conditions. A deterioration in confidence could therefore affect investment flows as well.
The bigger picture
The World Bank estimates that frontier-market economies are home to about one-fifth of the world's population, but account for only 3.1% of global capital flows and less than 5% of global GDP.
That gap is one reason international institutions have encouraged the development of deeper local-currency bond markets.
For Bangladesh, JPMorgan's move is therefore significant not because the bank is bringing $330 billion into the country, but because Bangladeshi government bonds are being placed on a major global investment benchmark alongside bonds from 25 other frontier economies.
The potential gain is greater access to international capital. The trade-off is greater exposure to global investors — and greater scrutiny of Bangladesh's economy, currency, policies and financial markets.
