Frontier market bonds the new edge in EM debt

A dedicated benchmark could move frontier local-currency debt from a niche allocation toward a more investable and diversifying segment of emerging-market fixed income.

• J.P. Morgan's GBI-EM Edge Index covers roughly US$328 billion of debt across 26 markets, with an average yield of around 10.4%, or 440 basis points above the mainstream EM local-currency benchmark.
• The index has expanded from 11 markets and 76 bonds representing approximately US$56 billion in 2017 to roughly twice the market coverage and almost six times the eligible issuance today.
• A recognised benchmark can improve visibility, liquidity and market infrastructure; Kazakhstan's reforms and rising foreign participation illustrate how governments may respond to attract capital.
• Aberdeen's analysis indicates that adding a 15% frontier allocation to a mainstream local-currency index could reduce volatility by close to one percentage point.
• Frontier markets offer higher growth potential through young populations, expanding workforces and roles in global supply chains, but their smaller scale, lower liquidity and weaker institutional frameworks require careful country selection.

Takeaway: GBI-EM Edge should make frontier local debt easier to assess and could attract more international capital, while investors must balance its diversification and yield potential against materially higher country and liquidity risks.