Investors Increase Bond Holdings as Supply Shrinks
The Nigerian bond market rallied, with investors increasing their bets on naira assets over first disinflation in 19 months and decline in supply by the debt agency.
Fixed interest securities investors took positions on Federal Government of Nigeria (FGN) bonds in the secondary market amidst positive expectation that disinflation will persist in the second half of the year.
Traders reported that demand were seen across tenors ahead of Debt Management Office (DMO) primary market auction in the new week. At the close of trading session, the average secondary market yield fell by 35 basis points in the week to 19.70%.
The yield contraction stemmed from a short squeeze on the MAR-2024 which dragged its yield downward by 35 basis points, according to fixed income analysts’ notes.
The economy is projected to pick up while the government continues to formulate policies and strategies to redirect macroeconomic indicators from slipping further.
In a circular, the DMO has scheduled to hold its monthly bond sales to investors this week as part of efforts to close the 2024 budget deficit gap.
The authority is set to offer reopening FGN bonds worth N190 billion across three tenors – less than N300 billion previously sold across standard maturities.
In its commentary note, fixed income analysts at Cordros Capital Limited said traders sought to take advantage of current rates following the reduction in the offer size.
Local borrowing via bond sales climbed to N4.3 trillion in July, according to the total sum of all auction sales thus far in 2024, with rates subdued but yet high for the Nigerian economic conditions.
Elevated inflation and interest rates triggered yield repricing in the fixed income market, and investors continue to seek more negative interest yield earnings on portfolio assets.
Traders said the average yield contracted by 35 basis points to 19.7% in the secondary market last week.
Across the benchmark curve, the average yield declined at the short (-43 bps), mid (-21 bps), and long (-12 bps) segments, Cordros Capital Limited stated in a note.
The yield contraction was a result of buying interests in the APR-2029, which then caused its yield to dip by 127 basis points.
There was also increased demand for the July 2030 bond, which also caused its yield to decline by 60 basis points, while buying interest in JUN-2053 bonds dragged its yield down by 52 basis points, according to the note.
“We believe the direction of yields in the secondary market will be shaped by the outcome of this month’s FGN bond auction holding on Monday.
“At the auction, the DMO is set to offer instruments worth NGN190.00 billion through re-openings of the 19.30% FGN APR 2029, 18.50% FGN FEB 2031 and 19.89% FGN MAY 2033 bonds.
“Notwithstanding, we maintain our medium-term expectation of elevated yields consequent to anticipated monetary policy administration globally and domestically and sustained imbalances in the demand and supply dynamics,” Cordros Capital Limited said.
CardinalStone Partner Limited said in an outlook for the segment that fixed-income yields are high and probably unsustainable; saying that the government appears to be ahead of its 2024 borrowing plans.
“We have concerns about the government’s strategy to finance the N6.3 trillion supplementary budget. Specifically, the reliance on sources like windfall tax on banks’ FX-related profits may not be sufficient, leaving legroom for a renewed reliance on CBN deficit financing and domestic borrowing,” the firm said. #Investors Increase Bond Holdings as Supply Shrinks
