FX Play Strategy — USD-Indexed Bond Allocation
The FX play strategy uses Obrigacoes do Tesouro Indexadas (OTX) bonds to earn attractive yields while protecting against kwanza depreciation. With OTX USD-indexed bonds yielding 7-9% and the kwanza under persistent depreciation pressure (USD/AOA currently at 914.60), this strategy is particularly relevant for foreign investors, export-oriented businesses, and any investor concerned about preserving hard-currency purchasing power.
How OTX Bonds Work
OTX bonds are issued by the Ministry of Finance in the domestic market and settled through CEVAMA, but their principal and interest payments are indexed to the USD (or EUR) exchange rate. This means:
- At issuance — The face value is denominated in kwanza but pegged to a specific USD amount at the prevailing exchange rate
- Coupon payments — Calculated on the USD-equivalent face value and converted to kwanza at the exchange rate on the payment date
- At maturity — Principal repayment is the USD-equivalent face value converted at the then-prevailing exchange rate
If the kwanza depreciates during the bond’s life, the investor receives more kwanza at maturity and on each coupon payment, preserving USD-equivalent purchasing power.
OTX Yield Comparison
| Instrument | Yield | Currency Risk | Effective USD Return |
|---|---|---|---|
| OTNR 5-year (kwanza) | ~20.5% | Full kwanza exposure | Depends on depreciation |
| OTX USD-indexed 5-year | ~8.0% | Protected (USD-indexed) | ~8.0% |
| Eurobond 2029 | ~8.5% | None (USD-denominated) | ~8.5% |
The yield differential between OTNRs (~20.5%) and OTX (~8.0%) at similar maturities represents the market’s implied kwanza depreciation expectation of approximately 12-13 percentage points annually. If actual depreciation exceeds this implied rate, OTX bonds outperform OTNRs in USD terms. If depreciation is less than implied, OTNRs deliver higher USD returns.
When the FX Play Works Best
- Kwanza depreciation exceeds market expectations — If the kwanza weakens by more than the approximately 12-13% implied by the OTNR-OTX spread, OTX holders capture excess returns.
- Oil price declines — Lower Brent crude prices (currently ~$74.50/bbl) reduce USD inflows to Angola, pressuring the kwanza and benefiting OTX holders.
- Foreign investors — Non-resident investors who entered the market under Aviso 15/19 and need to repatriate proceeds in USD are naturally suited to OTX bonds.
- Capital preservation — For investors whose reference currency is USD or EUR, OTX bonds eliminate the currency mismatch inherent in kwanza bond holdings.
When the FX Play Underperforms
- Kwanza stability or appreciation — If the BNA successfully defends the kwanza (through FX interventions, oil windfalls, or IMF support), OTX holders sacrifice the 12-13 percentage point yield premium available on kwanza bonds.
- Oil price rallies — Higher oil prices strengthen Angola’s external position and the kwanza, reducing the value of currency protection.
- Declining US rates — If global USD rates decline, the relative attractiveness of 7-9% OTX yields diminishes compared to risk-free alternatives.
Implementation
- Access the market — Purchase OTX bonds through the primary market auctions (via Portal do Investidor for retail, or through banks for institutional investors) or on the BODIVA secondary market.
- Select maturity — OTX bonds are available in maturities typically ranging from 2-7 years. Shorter maturities offer more liquidity; longer maturities offer slightly higher yields.
- Size the allocation — For a mixed portfolio, a 30-50% allocation to OTX bonds provides meaningful currency protection while retaining exposure to higher-yielding kwanza instruments.
- Monitor the spread — Track the yield differential between OTNRs and OTX bonds of similar maturity. A widening spread signals increased kwanza depreciation expectations; a narrowing spread suggests improving FX confidence.
Portfolio Context
The FX play strategy is rarely used in isolation. It is most effective as a complement to:
- Buy-and-hold — Core OTNR holdings for maximum yield, with an OTX overlay for currency protection
- Bond ladder — Incorporating OTX bonds alongside OTNRs across the maturity spectrum
- Income strategy — OTX coupons of 7-9% provide stable USD-adjusted income, even if lower in nominal kwanza terms
For the broader risk framework, see the risk analysis. For comparison to holding international Eurobonds instead, see the domestic vs external debt analysis.