Better Eurobond Yield to Keep Demand Coming, DMO to Hold Auction
Higher demand dragged the average yield on Federal Government of Nigeria (FGN) bonds lower in the just concluded week. However, analysts spotted that Eurobond offers an attractive yield for investors’ portfolios as prices tracked lower.
In their separate market notes, analysts said fixed income investors were mostly bullish in the secondary market last week as the value of FGN bonds traded increased for all maturities tracked amid increased demand.
However, with the increase in demand that spurs FGN bonds prices higher came a lower yield ahead of the inflation rate figure for April 2022. The headline inflation rate had printed at 15.92% in April, from 15.7 in March, according to data from the National Bureau of Statistics.
While steep inflation read widened real returns of fixed interest securities, investment banking firms’ have estimated that the consumer price index would surge further in May amidst uncertainties in the economy – including security pressures.
In its market report, Cowry Asset Management said the yields of 10-year, 16.29% FGN MAR 2027 paper rose by N0.03, 15-year 12.50% FGN MAR 2035 bond gained N0.28, 20-year 16.25% FGN MAR 2037 debt increased by N2.63 and 30-year 12.98% FGN MAR 2050 instrument rose by N0.52.
Meanwhile their corresponding yield fell to 11.07% (from 11.10%), 12.33% (from 12.37%), 12.24 (from 12.57) and 12.86% (from 12.93%). Traders said the value of FGN Eurobonds traded at the international capital market depreciated for all maturities tracked on sustained bearish sentiment.
The 10-year, 6.375% JUL 12, 2023 bond, the 20-year, 7.69% FEB 23, 2038 paper and the 30-year, 7.62% NOV 28, 2047 debt lost $0.93, USD3.26 and $1.61 respectively, according to a market report. Also, the instruments corresponding yields increased to 8.160% (from 7.28%), 12.11% (from 11.52%) and 11.76% (from 11.48%) respectively.
“We expect the value of FGN Bonds to fall (and yields to rise) as investors scramble for short term fixed income securities. Nevertheless, we expect investors to demand Nigerian Eurobonds as yields appear attractive”, Cowry Asset stated.
In the money market, there was pressure on short term interest rates, caused by liquidity strain in the financial system on Friday. In line with Cordros Capital expectations, the overnight (OVN) rate expanded by 424 basis points in the week to 9.2per cent, as funding pressures greeted the space with inflow underperforming outflows of funds.
The outflow which includes cash reserve ratio (CRR) debits on local banks for failing to meet the apex bank’s 65% loan to deposit ratio left the financial system. READ: FGN Eurobond Yield Falls Four Basis Points to 7.54%
Similarly, the CBN’s weekly open market operation (OMO) took out N30.00 billion and N10.29 outflow for FX auctions and NTB net issuance. These outflows were measured against the sum of N38.08 billion was the only inflow from OMO maturities.
“We highlight that system liquidity still remained healthy as the net liquidity position averaged N264.92 billion”, Cordros Capital said in a market report.
Analysts also expect the outflows resulting from OMO and FGN Bonds auction for this week’s auctions and arbitrary CRR debits, if any, to offset the inflows of N35 billion from OMO maturities and N8.50 billion FGN bond coupon payments. As a result, Cordros Capital said it expects the overnight lending rate to trend northwards.
Meanwhile, the Nigeria Treasury Bills (NTB) secondary market sustained last week’s bullish sentiments following the liquidity-driven demand for bills at the secondary market, according to traders’ notes.
Thus, the average yield across all instruments contracted by 7 basis points to 3.7 per cent. Across the segments, Cordros capital analyst said the average yields contracted by 5 basis points and 7 basis points to 4.0 per cent and 3.6per cent at the OMO and NTB secondary markets, respectively.
At the OMO auction last week, analysts recall the CBN fully allotted N50.00 billion worth of OMO bills to participants and maintained stop rates across the three tenors.
The tenored bill with103-day to maturity was closed at 7.0 per cent, 180-day to maturity was priced at 8.5 per cent and 355-day to maturity was sold at 10.1 per cent – as with prior auctions.
At the NTB primary market auction (PMA) conducted by the Central Bank of Nigeria, analysts spotted that demand continued to outweigh supply, as there was an oversubscription of 2.7x on N127.47 billion worth of bills on offer.
As a result, the auction closed with the CBN allotting N1.02 billion for the 91-day, N2.83 billion for the 182 – day and N134.01 billion for the 364-day.
The market recorded that the 91-day bill stop rate was unchanged at 1.74 per cent. Likewise, 182-day was priced at the same rate of 3.00 per cent as previous. However, spot rates on 364-day bills dipped to 4.70 per cent from 4.79 per cent.
“With system liquidity expected to tighten in the coming week, we anticipate an increase in the average yield on T-bills from current levels”, Cordros Capital said in the market report.
Traders said they are expecting the outcome of the May 2022 FGN auction to be held on Monday to influence the direction of yields in the bonds’ secondary market.
At the auction, the Debt Management Office (DMO) will be offering instruments worth N150.00 billion through re-openings of the 13.53 per cent FGN MAR 2025, 12.5000 per cent FGN APR 2032 and 13.0000per cent FGN JAN 2042 bonds. # Strong Eurobond Yield to Keep Demand Coming, DMO to Hold Auction
