JP Morgan is said to be finalising plans for a new, high-yield index to track local-currency government debt issued by frontier markets, the riskiest segment of the emerging markets universe. Reports suggest that the index is being built to meet rising investor demand, capitalise on strong recent frontier performance and create a benchmark that could become the go-to gauge for allocating capital into smaller, higher-risk emerging markets.

An index serves as a benchmark against which investors measure the performance of their portfolios. “The purpose of tracking indexes is not only to see the price behaviour over time, it opens the doorway to investments. In much the same way that the KSE-100 index performance leads to external portfolio investment into the domestic stock market, bond funds across the global markets open the door to investment in bonds across markets,” explains the treasury head at a major bank who spoke on condition of anonymity.

This initiative was reported by Reuters earlier this month and is supposedly in late-stage consultation with major global asset managers. The announcement is expected to come later this year followed by a formal launch next year.

Pakistan is among countries expected to feature prominently on it. Others include Egypt, Vietnam, Kenya, Morocco, Kazakhstan, Nigeria, Sri Lanka and Bangladesh. Each country will likely be capped at eight per cent, with some consultation documents suggesting up to 10pc. Only liquid bonds with a minimum size of $250 million and remaining maturity of at least 2.5 years — the time before full repayment is due — will be considered investible.

‘As a large debt market, Pakistan has the scale to attract meaningful institutional participation, provided liquidity and policy stability are maintained’

Foreign investors are increasingly recognising the long-term potential of emerging and frontier markets, particularly as technology adoption improves transparency, market access and operational efficiency, says Abdul Rehman Warraich, a bond market analyst. “Many global funds either track indices passively by allocating capital according to a country’s weight in the index or actively attempt to outperform the benchmark. In the latter case, if investors hold a favourable view on Pakistan’s macroeconomic prospects, they may choose to overweight Pakistani debt relative to its index allocation.”

According to him, Pakistan offers a range of government instruments, including treasury bills, Sukuk and Pakistan Investment Bonds, that provide multiple avenues for exposure across maturities and structures. “As a large debt market, it has the scale to attract meaningful institutional participation, provided liquidity and policy stability are maintained.”

Typically, frontier markets are favoured by developed market investors when big market security yields start drying up. With the prospect of more Fed rate cuts in the US and potentially similar actions by other large central banks seen holding rates at current levels, there is a strong case for flows into higher yielding instruments across developing and frontier markets. “This is also a fairly neglected market when you measure the extent of capital flows into frontier markets versus the on-ground size of these markets and the populations of these markets,” the treasury chief argues.

Meanwhile, tradable frontier-market local-currency debt has tripled in the last decade to about $1 trillion and over the last eight years, frontier local-currency bonds have outperformed mainstream emerging market (EM) local currency bonds by almost 2.5 percentage points and also outstripped the EM dollar bond index, signalling that many frontier economies have been structurally undervalued.

Analysts say the JP Morgan Index suggests that the bond markets in frontier countries are now developed enough and deep enough for investors to foray into these markets and take on local currency risk for higher absolute returns.

“The Wall Street bank’s plans convey the intent that frontier bond markets are perhaps ripe for investment. This is more than likely because a lot of the countries forming the index such as Pakistan, Egypt, Kenya, etc are experiencing disinflation and that is resulting in their local currency bonds becoming more attractive especially given the prospect of policy rate reductions and the consequent rise in the prices of bonds,” the treasury head maintains.

While most analysts are bullish on Pakistan’s prospects of attracting global funds once the index is finalised, others say “the proposition is less straightforward”.

“With investment-grade bonds in global markets currently offering yields in the range of 4.5pc to 5.25pc, it is reasonable to question the attractiveness of Pakistan’s local currency debt at around 10pc to 10.5pc. On paper, the nominal yield differential appears significant. But once exchange rate risk is factored in, that premium narrows considerably,” says a Dubai-based Pakistani banker.

“An international investor allocating capital to PKR-denominated debt must price in the probability of rupee depreciation. Even a modest annual devaluation can erode much of the apparent yield advantage. After adjusting for currency risk, transaction costs and country risk premium, the effective delta over safer investment-grade assets does not look compelling enough for many conservative investors.

Unless investors are convinced that the rupee will remain broadly stable or that further devaluation risk is limited, the current yield spread may not sufficiently compensate for currency volatility. In that context, while sentiment toward Pakistan has clearly improved, the attractiveness of PKR-denominated bonds remains more nuanced than headline interest rates suggest, he adds.

Mr Warraich doesn’t agree. “Interest rates typically incorporate expectations of inflation and currency depreciation. Local currency returns already embed a premium for anticipated devaluation unless the economy faces an extreme shock.”

“The flow of capital into local currency debt in frontier markets is a positive thing. It helps deepen the markets. Once foreign investors become comfortable and see a stable and consistent market they tend to venture into corporate bonds and other areas. But the way in which the capital flows and the mercurial nature of the capital when things get a bit hot needs a very vigilant and active central bank for things to run smoothly,” argues the treasury head.

“Pakistan has seen its share of hot-money come in and go out during the Reza Baqir days of the State Bank. While the central bank was happy to buy and keep the dollars in reserve when investors entered, it wasn’t very forthcoming when the same investors exited and needed to repatriate their hard currency. This resulted in a disproportionately large swing in the rupee when the hot money flowed out.

“Frontier economies are susceptible to environmental and geo-political shocks to a much larger extent and the reaction function in these markets leads to much more volatility than in developed markets. Also, large flows coming in have a disproportionately large impact on the domestic currency unless the central bank of that country actively dilutes the flow and buys the hard currency for its reserve. This allows for a war chest that can be tapped when these flows end up leaving sooner than expected because of an event that the foreign bond fund manager had not seen coming.”

Mr Warraich agrees that concerns about sudden capital outflows are valid, “However, the presence of foreign portfolio investors can also exert constructive pressures on policymakers. The risk of capital flight incentivises governments to maintain fiscal discipline, pursue prudent macroeconomic management, safeguard external stability and strive for improved sovereign credit ratings. Over time, sustained reforms could facilitate graduation into broader emerging market bond indices. In the long run, such integration can strengthen institutional discipline and deepen financial markets provided the accompanying risks are managed carefully.”

He maintains that for Pakistan, this presents an opportunity that requires an active and coherent strategy.

Published in Dawn, The Business and Finance Weekly, February 23rd, 2026