FGN Eurobond Yield Spikes, Sell Pressures Hit Local Bonds
In the secondary market, trading on the Federal Government of Nigeria (FGN) bond ended on a bearish note in the just concluded week as sell-side pressures were seen at the short, mid, and long ends of the yield curve, traders said.
Consequently, the average yield inched higher 30 basis points to close at 10.69% on Friday while the Eurobond market returned impressively as investors continue to be wary of naira assets due to the twin effects of devaluation and inflation.
According to traders’ note reviewed by MarketForces Africa, the average yield on FGN Eurobond yield inches up near 10% again while treasury market traders hibernated following declining spot prices at the Central Bank of Nigeria primary market auctions in the year.
In the first quarter of 2022, spot rates from the apex bank primary market auctions have been reducing due to heavy positioning despite a rising headline inflation rate in Nigeria
Fixed income traders’ notes show that trading activities on Nigerian Treasury bills were cold, quiet as negative real returns further expose investors’ naira assets.
In the open market operation segment of the Central Bank of Nigeria also, the apex bank failed to refinance maturing OMO bills, thus flooding the financial system with liquidity.
As of Friday in the money market, the average interbank rate dipped, both overnight lending rate and open buy back rate were down due to the absence of liquidity pressures.
The overnight rate contracted by 350 basis points from the previous week to 6.2% in the just concluded as inflows of N534.35 billion from FAAC disbursements and N42 billion OMO maturities hit the financial system.
The impact, according to Cordros Capital analysts outweighed cash reserve ratio debits from banks for failing to meet the 65% loan to deposit ratio and the FGN’s monthly bond (N297.01 billion) and CBN’s weekly FX auctions.
“We expect the overnight rate to remain elevated in the double-digit region as expected inflows from OMO maturities (N10.00 billion) and FGN bond coupons (N40.77 billion) are likely to be offset by funding pressures for new week auctions (NTB, OMO and FX)”, Cordros Capital analysts said.
Last week, Debt Management Office (DMO) conducted a primary market auction for N150 billion reopenings bonds that were greeted with high subscriptions levels and opportunity for downward repricing.
As anticipated by traders, demand was strong, with a subscription level of N598.42 billion – the highest subscription level recorded in the year – translating to a bid-to-offer ratio of 4.0x.
However, the DMO allotted N296.37 billion worth of bonds. A total of N127.00 billion for the 12.50% FGN JAN 2026 and N169.37 billion for the 13.00% FGN JAN 2042 as lower spot rates. Bond auction results show that stop rates for FGN JAN 2026 plunged to 10.15% from 10.95% while JAN 2042 stop rate fell to 12.70% from 13.00%.
In a market report, Cowry Asset Management said despite the moderation in stop rates, traders were still bearish on most maturities tracked except for the 30-year 12.98% FGN MAR 2050 instrument which appreciated by N1.25 while its yield nosedived to 12.60% (from 12.80%).
The 10-year, 16.29% FGN MAR 2027 paper, the 15-year 12.50% FGN MAR 2035 bond and the 20-year 16.25% FGN MAR 2037 debt depreciated by N0.53, N0.08 and N0.73 respectively; their corresponding yields increased to 10.26% (from 10.16%), 11.79% (from 11.78%) and 12.05% (from 11.97%) respectively.
Elsewhere, the value of FGN Eurobonds traded at the international capital market depreciated for all maturities tracked on renewed bearish sentiment.
The 10-year, 6.375% JUL 12, 2023 bond, 20-year, 7.69% FEB 23, 2038 paper and the 30-year, 7.62% NOV 28, 2047 debt lost $0.62, $3.10 and N3.68 respectively; their corresponding yields rose to 5.29% (from 4.82%), 9.73% (from 9.30%) and 9.76% (from 9.30%) respectively.
In the new week, Cowry Asset analysts expect to see bearish activity in the FGN bond space as investors look the way of high yielding Eurobonds which crossed the 10% level. READ: Debt Investors See Mixed Yields Ahead of DMO, CBN Auctions
Given the muted activity in the treasury bills primary market which led to strong demand in the secondary market, as investors scrambled for T-bills, traders said they saw Nigerian Treasury bills true yield, NITTY, moderate for most maturities tracked.
Specifically, NITTY fell for 1 month, 3 months and 6 months maturities to 2.33% (from 2.52%), 2.71% (from 3.03%) and 3.22% (from 3.35%) respectively. However, NITTY for 12 months maturity rose to 4.24% (from 4.14%), according to Cowry Asset.
“The OMO space was dry as well as CBN failed to refinance the matured OMO bills worth N42 billion hence, increasing the financial system liquidity which drove the Nigerian Interbank Offered Rate (NIBOR) lower for most tenor buckets”.
In the OMO segment, the average yield closed flat at 3.6% as market participants stayed on the sidelines in anticipation of an OMO auction. The CBN did not float an OMO auction last week for the first time this year after twenty consecutive weeks of regular auctions.
Overnight funds, 1 month and 6 Months tenor buckets fell to 7.73% (from 8.57%), 7.53% (from 7.54%) and 8.19% (from 8.45%) respectively. However, 3 months tenor bucket rose to 7.68% (from 6.95%).
In the week, T-bills worth N153.29 billion will mature via the primary and secondary markets to marginally exceed T-bills worth N143.29 billion which will mature via the primary market. The maturity in the primary market included 91-day bills worth N2.49 billion, 182-day bills worth N2.09 billion and 364-day bills worth N138.71 billion.
“We expect the stop rates to marginally decline amid fresh liquidity boost from the maturing bills and the bias of CBN for an expansionary policy that keeps the policy rate at 11.50%”, Cowry Asset said in a note. #FGN Eurobond Yield Spikes, Sell Pressures Hit Local Bonds
