(Bloomberg) — As the hunt for investments that can withstand rising interest rates gathers pace, frontier assets are gaining popularity over their larger emerging-market peers.The bonds of the world’s least-developed economies have returned 2.6% this year, keeping pace with their 2020 performance, while higher-ranked emerging-market debt has lost almost 2%, reversing some of last year’s 5.3% advance, according to JPMorgan Chase & Co. indexes.With speculation growing that the world’s post-pandemic economic recovery is fueling inflation, the bonds of smaller developing nations are luring buyers as their securities tend to be of shorter duration — meaning they are less sensitive to expectations for interest-rate increases. The average duration of frontier-market sovereign bonds is six years, compared with 7.9 years for traditional emerging markets, JPMorgan indexes show.“People are still worried interest rates have to rise and they are looking for yield and interest-rate duration,” said Leo Hu, who co-manages the $7 billion Emerging Markets Debt Hard Currency Fund at NN Investment Partners in Singapore. Frontier bonds may return at least 9% in the next 12 months, he said.The burgeoning interest in frontier assets nonetheless represents a threat to the global economy as central banks move back into policy-tightening mode. Less developed nations, such as those in Africa, present a higher chance of default than their larger emerging-market peers. And the more funds they attract, the greater the threat of potential contagion should rising borrowing costs hamper economic growth.Into AfricaIn terms of geography, money managers who specialize in frontier assets are almost united in favoring Africa, saying the region will benefit the most from rising raw material prices. These include Angola, Ghana and Zambia — even though the latter became the first African country in the Covid-19 era to default when it skipped a Eurobond payment last year.Zambia has benefited as copper has risen to record highs, with demand bolstered by the global recovery and the transition toward green energy. The metal accounts for almost 80% of Zambia’s export earnings. The nation’s dollar debt has returned 24% this year amid prospects of an International Monetary Fund bailout, second only to Ecuador among the roughly 75 emerging markets tracked by Bloomberg Barclays indexes.Angola, Africa’s second-biggest oil producer, is another favorite. A slide in crude prices last year triggered by the pandemic led the country to seek $6.2 billion of relief from its major creditors, easing fears of a default in one of the continent’s most-indebted countries. Angola’s bonds have returned 12% this year, according to a Bloomberg Barclays index.African bonds also stand out from their peers in terms of yields. Ghana’s 2025 securities currently yield 6.3%, while similar-maturity Angolan debt yields 7%, according to data compiled by Bloomberg. That stands in contrast to traditional emerging markets. The 10-year bonds of Indonesia yield just 2.4%. Mexico’s yield 3.1%.“We have been allocating more to frontier sovereign credits,” said Jens Nystedt, a fund manager in New York at Emso Asset Management, a specialist on fixed-income investments in emerging markets overseeing $6.8 billion. “In particular, we like the outlook for Nigeria, Ghana and Angola given that they would be some of the main beneficiaries from higher oil prices.”Bailout ProgramSentiment toward frontier markets was also boosted this year after the International Monetary Fund announced a plan to create $650 billion in additional reserve assets to help developing economies cope with the pandemic.IMF support has been crucial for the likes of Pakistan, which raised $2.5 billion in March after the resumption of a $6 billion bailout program. Ecuador’s new government plans to reach a deal with the IMF to ensure financial stability and unlock some of the funds related to the $6.5 billion financing agreement reached last year.Frontier-nation bonds offer higher yields for a reason — they are judged to have a higher chance of default. But many fund managers aren’t deterred.“There are quite some risks, such as the worsening of the pandemic or too much stimulus, but we stick with the rosier scenario for frontier markets,” said Edgardo Sternberg, co-manager for emerging-markets debt portfolios in Boston at Loomis Sayles & Co., which oversees $3.5 billion of developing-nation bonds. “Frontier markets should continue to outperform,” he said.Central bank meetings in Nigeria, Kenya and Angola will be in focus this week. Elsewhere, policy makers in Indonesia and South Korea will also decide on interest rates.Rates on HoldNigeria is likely to keep its key interest rate unchanged on Tuesday as the fragility of its economic recovery outweighs concerns about inflation, which remained more than double the the bank’s official target ceiling in AprilMonetary authorities in Kenya and Angola are also expected to hold rates on Wednesday and Friday, respectivelyWhile central banks in Indonesia and South Korea will also likely keep rates steady this week, the focus will be on the signs for a change of tack in the months aheadOn Tuesday, traders will be watching to see if Bank Indonesia prioritizes currency stability over supporting growth amid concerns over a quickening in global inflation and the country’s slow pace of vaccinations. The rupiah was Asia’s worst-performing currency last week and the nation’s sovereign bonds extended lossesOn Thursday, the Bank of Korea’s forecasts for growth and inflation will be in focus as the central bank updates its economic projectionsWhile Colombia’s central bank will convene on Friday, the gathering is not a monetary policy meeting, according to Bloomberg EconomicsInvestors will watch for further market impact in Colombia as the nation faces more credit downgrades, which would solidify its loss of investment-grade statusEconomic DataChina’s industrial profits probably continued to log a double-digit growth rate in April, although the pace may have slowed from March, according to Bloomberg Intelligence. Faster factory-gate inflation was likely a support as well as strong exports, economists including Chang Shu wrote in a noteThe onshore yuan is holding close to its strongest level since 2018 amid an improving outlook for China’s economy. It’s on track to become the best-performing currency in Asia this month after India’s rupeeChinese debt is similarly outperforming all emerging-market peers; the benchmark 10-year sovereign yield has fallen nine basis points year-to-dateData due Monday is likely to show Taiwan’s April industrial production grew at the fastest pace since January while unemployment might have edged down to 3.7%, the lowest in over two yearsThe Taiwan dollar has remained resilient in recent weeks, supported by strong demand for the nation’s exports, even as a worsening Covid-19 outbreak has forced authorities to widen a lockdown to the entire islandInvestors will also get an update on how the region’s trade sector is improving, as figures from Thailand and Malaysia are due Tuesday and Friday, respectivelyIndustrial production and inflation numbers from Russia will come under scrutiny, with the ruble beating most of its peers in the past month on the prospect of more policy tightening. The data come Tuesday and Wednesday, respectivelyMexico’s bi-weekly inflation reading due Monday is expected to show a decline in the first half of MayOn Wednesday, traders will monitor final first-quarter gross domestic product data for any changes versus last month’s estimateBloomberg Economics expects the release of minutes on Thursday from the latest central bank meeting to reflect a less dovish toneBrazilian IPCA consumer price inflation data for May, scheduled for Tuesday, will probably see an uptick amid higher electricity prices, according to Bloomberg EconomicsInvestors will watch current-account figures for April on Wednesday for signs that a strong trade surplus boosted the balance. Unemployment numbers the next day may reflect increased restrictions in March as infections rose.More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.