Hawkish Easing: Why BofA Is Betting on Forward Contracts in Kazakhstan

Following another rate cut by the National Bank, the investment landscape in Kazakhstan’s debt market has changed, according to analysts at Bank of America in a report titled “Hawkish Easing.” While expectations of falling inflation and monetary easing previously supported demand for government bonds, the potential for further declines in yields is limited in the coming months. Experts expect the base rate to be cut by no more than 1 percentage point by the end of the year, with inflation falling from the current 9.8% to below 9%. Therefore, they believe that over the next three months, most bond issues may yield less than non-deliverable forward (NDF) contracts. BofA cites two-year bonds as an exception, as they appear more competitive than longer-term issues.

Currently, yields on Kazakhstani government securities stand at 14–16% per annum in tenge. Since late 2025, demand for these securities has been driven by expectations of rate cuts. However, after cutting the base rate by 1 percentage point in June, the National Bank of Kazakhstan slowed the pace somewhat: in July, the rate was cut by 0.25 percentage points, and in September, by 0.5 percentage points. Two more rate-setting meetings are scheduled for this year, but BofA analysts believe the rate will be cut by no more than 1 percentage point in total at those meetings.

“Given the relatively limited scope of rate cuts expected this year (a total of 100 basis points), the still-wide spread between bid and ask prices for domestic bonds (about 60 basis points), and the risks of fiscal easing next year, bonds may not outperform NDFs on average by year-end,” the investment bank’s report states.

NDF (Non-Deliverable Forward) – a contract under which the difference between a predetermined exchange rate and the actual exchange rate is paid on the settlement date. At the time of writing, quotes for the three-month forward exceededthe current exchange rate by 14.1–15.3 tenge, while for the six-month forward, the difference was already 27.2–29.5 tenge. At the current exchange rate of about 447.2 tenge per dollar, this corresponds to approximately 461–463 tenge in three months and 474–477 tenge in six months.

Over a six-month horizon, the picture for “two-year bonds” changes: even taking into account the bid-ask spread, they already outperform the forward contract by a yield margin of approximately 0.6 percentage points. For other securities, the situation is only getting worse—to catch up with the forward, their yields would need to decline by another 0.1–0.2 percentage points.

The report notes that, compared to the currencies of other emerging markets, the tenge is already overvalued by 6.6% against the dollar. However, according to experts, this reflects structural changes in the country’s economy—primarily fiscal consolidation. And since long positions in the tenge do not currently appear “overweight,” they expect the Kazakhstani currency to remain stable overall.

The appeal of longer-term bonds is restored only when planning for longer time horizons. According to BofA’s forecast, inflation in Kazakhstan will continue to decline, albeit more slowly than previously expected—and by mid-2028, it will return to its previous trajectory. Consequently, the base rate may eventually reach 10%.

Analysts are concerned about the government’s plans to increase spending from the National Fund from 2.7 trillion tenge in 2026 to 4.4 trillion tenge in 2027 and then stabilize it at 3.5–3.9 trillion tenge over the following two years. However, this effect may be mitigated by the intention to reduce the budget deficit from 2.5% in 2026 to 2.3% in 2027 and to 0.9% in 2029.

According to BofA’s forecast, government debt securities will once again become more attractive than currency forwards over a one-year horizon, even if the rate by 2028 falls not to 10 percent, but at least to 12 percent, Bank of America analysts believe.

Bank of America's report was prepared prior to the Fed's most recent rate hike: On September 16, the Fed raised rates by 0.25 percentage points for the first time in more than three years.

This article was AI-translated and verified by a human editor