The Republic of Congo’s unrated US$ 2029 sovereign bond is now trading at an all-time high, reflecting the strength of global risk sentiment in general, and the appetite for African fixed income instruments in particular. While I don’t see any fundamental reason for the instrument to continue rising, I do think its recovery bodes well for the plethora of other sovereign launches slated for 2010.

Although the most recent move could simply reflect liquidity constraints – bid/ask spreads are regularly in excess of 500 basis points – the bond’s recovery since March 2009 has been nothing short of remarkable. Indeed, from a low of just under 20.00 in March, the instrument had recouped all its losses by November, and is now trading at a trough to peak gain of over 180%!

To my mind, this rally should be seen within the broader context of rising risk appetite and improving fundamentals as the investment community realised that African economies would fare comparatively well in the global recession. On this note, recall that Ghana and Gabon’s sovereign bonds had already returned to their pre-crisis highs by early September, where they continue to trade at present. The move also speaks to the strength of investor appetite for African fixed income instruments, with the available supply still far below current levels of demand.

Despite these positive signs, I don’t see anything in the fundamental picture to support a rise much beyond current levels. The outlook for the key sources of foreign exchange – foreign investment into the oil, timber and agricultural sectors – is not materially better than at the time the bond was launched, while the government’s ability to service the debt may in fact have deteriorated in 2009. In fairness, though, with a current coupon rate of 2.5%, the annual debt service cost (US$11.9mn) is still only a fraction of exports (estimated at US$6.09bn in 2009) and foreign reserves. But given the bond’s steep rise over the past several months, I think some caution is warranted, and I do not rule out a short-term period of consolidation.