Average Yield on Bonds Drops to 8% as Naira Comes Under Pressure

Average Yield on Bonds Drops to 8% as Naira Comes Under Pressure

Average yield on government bonds dropped to 8% this week as Nigerian local currency, Naira, comes under pressure in the foreign exchange market.

The Nigerian bond market closed the week positive with average yield dropped off 5 basis points week on week according to note from Afrinvest Limited.

Analysts noted that yield plunged on all trading sessions save on Friday when the market recorded 9 basis points uptick. 

Across tenors, the short-term bond saw sell-offs as yield rose 5 bps while the medium and long-term bonds saw strong demand following an 11 bps and 6 bps drop in yield week on week respectively.

Also, Greenwich Merchant Bank Limited in a report stated that the fixed income market traded on a mixed note as outcomes varied across markets.

The Nigerian treasury bills market opened on a bearish footing at the start of the week with average yield reaching 1.2% before moderating.

By mid-week, yield on T-Bills moderated following buying interests across the curve.

Specifically, market data indicates that bids on long-dated bills on Wednesday pushed the average yield in the market lower by 21 basis points bps to 1.0%.

While the market returned bearish in the subsequent sessions, the momentum was not enough to reverse the decline in yields, Greenwich noted.

Thus, yields averaged 1.0% at the close of trade on Friday compared to 1.1% last week.

“Next week, we expect the rollover of bills worth ₦19.8 billion, ₦10.0 billion, and ₦140.0 billion across the 91-day, 182-day, and 364-day instruments, respectively.

At the Primary Market Auction (PMA), analysts said they expect investors to continue to widen the bid range in search of higher stop rates.

Elsewhere, the open market operations (OMO) market was largely bearish, marked by a 31 bps rise in yields to an average of 2.0% from 1.7%.

During the week, Greenwich hints that Nigerian central bank sold OMO-bills worth ₦10.0 billion (89-day), ₦10.0 billion (180-day), and ₦51.7 billion (362-day) at superior rates of 7.0%, 8.5%, and 10.1% apiece.

“This is a sharp spike to the prevailing rates seen in the market lately”, analysts said.

Greenwich opines that the steep hike in OMO-bills stop rates by the Apex bank is an attempt to stem down FX demand pressure from foreign investors stuck in the market.

“Next week, we expect OMO-bills maturity worth ₦213.9bn to hit the system, thereby, further bolstering liquidity”, it added.

In the money market, tightened financial liquidity mounted pressure on rates.

The Open Buy Back and Over Night rate remained elevated, closing at 17.5% and 18.0%, up from 10.5% and 11.0% respectively in the previous week.

Also, the Bonds market traded with a bullish bias.

Notably, yields contracted across the belly (-23bps) and tail (-7bps) segments of the market, while investors sold off instruments at the short end (+12bps).

Consequently, the average bonds yield dipped by 7bps to settle at 8.0% from 8.1% on a week on week basis.

In the FX market, the Naira weakened at the parallel market to ₦480.00 to a dollar from ₦478.20 in the prior week.

Further afield, turnover eased by 23.4% week on week in the Investors’ & Exporters’ Window (I&EW) to a weekly average of USD200.4 million compared to USD261.5mn in the prior week.

Against this backdrop, the Naira came under pressure at the I&E Window to close at an average of ₦395.56 to dollar relative to ₦394.24.

Analysts at Greenwich Merchant Bank said in the coming week, they expect investors to remain cautious and pessimistic in the fixed income space.

Meanwhile, Cowry Asset Management Limited hints that the value of FGN Eurobonds traded at the international capital market appreciated for most maturities tracked.

The 20-year, 7.69% FEB 23, 2038 paper and the 30-year, 7.62% NOV 28, 2047 debt gained USD3.12 and USD3.44 respectively, while their yields fell to 6.91% (from 7.22%) and 7.02% (from 7.30%) respectively.

“In the new week, we expect local Over-the-Counter bond prices to appreciate (and yields to decrease), especially for 20-year paper as the yield touched 10%”, the firm added.

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Average Yield on Bonds Drops to 8% as Naira Comes Under Pressure