TCX Launches Frontier Currency Bond Index

The Currency Exchange Fund (TCX) says it has launched the “first-ever frontier bond currency index.

The new index tracks the performance of frontier currency-linked, investment-grade Eurobonds, issued by (multilateral) development finance institutions such as the African Development Bank, EBRD, FMO, and the IFC. The TCX FI currently covers 77 bonds in 20 frontier currencies where TCX has acted as hedging counterparty to the issuer. During a three-year back-testing, the firm says the index outperformed a comparable EM-currencies portfolio in risk-return and diversification terms.

The uniqueness of the index lies in its underlying exposure, which includes frontier currencies such as the Uzbekistani som, Honduran lempira, Tanzanian shilling, and Vietnamese dong, which are not covered by existing indices. TCX calculates bond price information from the valuation of the bond’s hedges outstanding in its books.

The firm says frontier debt is gaining traction among investors looking for alpha generation and portfolio diversification, but remains underinvested due to high illiquidity, perceived risk, and accessibility concerns. It adds TCX has been set up specifically to provide currency risk protection to hard currency borrowers in countries where the market fails to deliver solutions.

The proceeds of the frontier currency-linked Eurobonds fund institutions whose mission is to create impact in developing countries whilst applying the highest ESG criteria in the industry, TCX explains. Settled in euros or dollars, the bonds provide an accessible road to frontier currency exposure with minimal credit risk and no transfer and convertibility risk, it adds. The development of the index was made possible by the German Ministry of Economic Cooperation and Development, BMZ.

“Frontier currency bonds offer a unique combination of investment-grade credit risk with the market risk and return of frontier market currencies,” says Ruurd Brouwer, CEO of TCX. “Through TCX, the bonds redistribute currency risk from enterprises and financial institutions in frontier markets that cannot bear it, to asset managers and pension funds in the West that seek the additional return that comes with the risk. The index is an important step in generating visibility and transparency in this high impact asset class, showing that the real risk-return profile is better than the perceived one.”