Bonds, T-Bills Supply to Decline as FG Mulls Eurobond Issuance
Bonds, Treasury bills supply will decline in the second half of 2021 as Federal Government (FG) mulls Eurobond issuance from $6.18 billion foreign currency borrowing plans for the year, analysts hinted in a new report.
The Nigerian fixed income market performance has remained tepid for the most part of the second quarter of 2021 as rates repricing slow down significantly. Rates slow down gathered momentum after inflation rate slides in April and May with cold outings in June 2021.
Steep headline inflation rate in the country keeps return on fixed income instruments negative, though Chief Executive Office Dunn Loren Merrifield told MarketForces Africa risk-free instruments are not meant to cover inflation.
In a recent report obtained by MarketForces Africa, Vetiva Capital said the low rates seen through much of 2020 which kept borrowing costs low and drove investors into the Equity market began to reverse, albeit sooner than expected at the start of 2021.
Recall Nigeria’s Debt Management Office (DMO) had started off upward rates adjustment at February 2021 Bonds auctions when the stop rate on the 10-year instrument hit 10.25% for the first time since January 2020 when the market recorded 11.125%.
“Thus far, rates have ticked up by 6.08 percentage points since December 2020, with Nigerian Treasury Bill stop rates following a steeper upwards trend- the rate on the 364 day to maturity bill reached a high of 9.75% in May from 1.50% in January”, Vetiva Capital report hinted.
Analysts stated that the main reason for this reversal in rates has been the sustained pressure on foreign exchange reserves, further hike in inflation rates since the start of the year and the lack of interest from foreign portfolio investments (FPIs) as was widely predicted.
However, analysts believe that this recovery in rates on the 1-year security has not trickled down into the shorter-term papers. It was specifically hinted that rates remain in the low single-digit realm on those securities, limiting activity on the shorter end.
Bonds, T-Bills Supply to Decline as FG Mulls Eurobond Issuance
This was attributed to a possible incentive to lenders to pursue real-sector returns, as analysts added that the state of the Nigerian economy has meant a dearth of real investment opportunities.
“For the second half of the year, we expect rates to continue to rise”, Vetiva Capital said in the report.
However, Vetiva analysts said they do not expect a return to the 14%-16% levels of 2016, as the Central Bank of Nigeria (CBN) and DMO continue to artificially weigh down rates.
Government’ debt office had ramped up borrowings in the past year as rates on fixed income instrument plunged significantly, thus reduce the nation’s borrowing costs.
Some market analysts believe the move crowd out corporates from accessing funds strong enough in the Nigerian debt market as government took centre stage.
“With international lending rates also remaining somewhat depressed – the 10-year US Bond yield is currently at 1.64% — we expect the Federal Government to pursue international lending options, with talks of a $3 billion Eurobond already circulating”, Vetiva Capital analysts stated.
Meanwhile, analysts stated that yield recovery will attract investors back to secondary fixed income market. So far in 2021, analysts said they have observed a return to the fixed income market on the back of rate hikes which coincided with a dip in the local equity market as investors continue returning to their safe haven investments.
However, analysts concluded that the rates in the local market are still well below current inflation rates, a situation exacerbated by the weakening Naira.
“This means that, until either inflation cools off from current levels, or rates inch up significantly, we do not see a situation where secondary market performance will overtake the Equity market, based on positive fundamentals in that market.
“Furthermore, with the announcement of FGN’s intention to borrow some $6.18 billion from the international market through various means, we expect local bonds and T-bills supplies to remain somewhat limited”, Vetiva Capital said in the report.
Bonds, T-Bills Supply to Decline as FG Mulls Eurobond Issuance
