Bond Yield Slumps, Liquidity Shrinks after DMO Auction
Patience Oniha, DMO Boss

Bond Yield Slumps, Liquidity Shrinks after DMO Auction

The average yield on Nigeria’s bonds was relatively steadied, with a bullish undertone as real return on naira assets widened with inflation surge. Data from the statistics office showed headline inflation rate accelerated to 22.79% in June, and analysts expect further surge throughout the third quarter of 2023.

In the fixed income market, investors earn negative interest rates on authority refusal to pay premiums on risk-free assets – a position helped by surging demand for borrowing instruments.

In the secondary market, bond trading ended on a bearish note midweek. The average yield declined by a basis point to 12.8%, trailing average inflation.  In its market update to investors, Cordros Capital Limited said that the average yield expanded at the mid (+20bps) segment across the benchmark curve.

Fixed income analysts and traders said the expansion at the curve came as investors sold off the APR-2029 (+37bps) bond, but dipped at the long (-3bps) end following buying interest in the APR-2049 (-21bps) bond.

Specifically, due to portfolio offloading, the yield on APR-2029 FGN bonds rose by 37 basis points. However, a buying interest in the APR-2049 FGN bond drawback its associated yield by 21 basis points.

Conversely, the average yield closed flat at the short end, Cordros Capital analysts said.  Meanwhile, Cowry Asset Management Limited observed losses in mid-term bonds, particularly the 26 APR 2020 bond, resulting in a slight increase in the average secondary market yield to 12.27% up from 12.21%.

The 10-year FGN Bond yielded around 12.97%, which was a decline previous yield of 12.75% earlier reported on Tuesday.  Meanwhile, the 20-year and 30-year papers held steady at 14.35% and 14.12%, respectively.

Analysts said they expect the outcome of the July 2023 FGN bond auction held on Monday to influence the sentiments in the secondary market. >>> Nigerian Treasury Bills Yield Rises to 7%

At the auction, the Debt Management Office (DMO) offered instruments worth N360.00 billion through re-openings of the 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2038 and 15.70% FGN JUN 2053 bonds.

The auction result showed significant oversubscription which dragged financial system liquidity to negative after settlement midweek. MarketForces Africa reported that the overnight lending rate expanded significantly by 888 basis points to 12.3%.

This was a result of the settlement of the FGN bond primary market auction on Monday worth N657.84 billion.  As a result, the financial system liquidity closed negative at ₦121.86 billion from ₦412.59 billion

Cordros Capital analysts expect frontloading of significant borrowings for the year by the FG will result in an uptick in bond yields as investors demand higher yields in the face of elevated supply.

Elsewhere, FGN Eurobonds depreciated across most tracked tenors amid sustained bearish sentiment, leading to a marginal expansion in the average secondary market yield to 10.37%.

Last week, FGN Eurobonds appreciated across all maturities amid renewed bullish sentiment. Specifically, the 10-year, 6.50% NOV 28, 2027, the 20-year, 7.69% FEB 23 2038, and the 30-year, 7.62% NOV 28 2047, recorded gains of USD 2.65, USD 4.88, and USD 4.91, respectively, while their corresponding yields contracted to 8.79% (from 10.09%), 10.90% (from 11.76%), and 10.81% (from 11.60%), respectively. #Bond Yield Slumps, Liquidity Shrinks after DMO Auction

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