Bonds Yield Hits 13.7% as Market Reacts to False Alarm

Bonds Yield Hits 13.7% as Market Reacts to False Alarm

The average yield on Nigerian government bond instruments jerked upward to 13.7% in reaction to debt restructuring statement ahead of Debt Management Office (DMO) primary market auction on Monday.

As part of its borrowing programme, thee DMO will offer instruments worth N225.00 billion through re-openings of the 14.53% FGN APR 2029, 12.50% FGN APR 2032 and 16.2499% FGN APR 2037 bonds.

A slew of market analysts and fixed interest securities traders said the auction will be oversubscribe, though liquidity position in the financial market is relatively weak but there is expectation DMO will offer the instruments at higher rates.

Last week, bearish sentiments persisted in the FGN bonds secondary market as the average yield expanded by 21 basis points to 13.7%, according to traders’ notes reviewed by MarketForces Africa.

Cordros Capital analysts said they attribute this bearish sentiment to sell-offs across the mid and long spectrums as investors reacted negatively to the Finance Minister’s debt restructuring comments and took positions in anticipation of the October 2022 bond auction scheduled to hold on Monday.

Across the benchmark curve, analysts said the average yield contracted at the short (-3bps) end as investors demanded the MAR-2025 (-34bps) bond.

Yields expanded at the mid (+50bps) and long (+18bps) segments, following the profit-taking activities on the NOV-2029 (+53bps) and JAN-2042 (+55bps) bonds, respectively.

“We expect the outcome of the FGN auction holding on Monday to shape the sentiments in the bond secondary market next week”, analysts said in the market report.

Analysts said in the medium term, they maintain a view of an uptick in bond yields, as both the FGN’s borrowing plan for 2022 and the expected fiscal deficit point towards an elevated supply.

In the money market, short term rates eased as financing pressures decline. Data from FMDQ Exchange indicated that the overnight lending rate dipped this week by 75 basis points to close at 16.5%.

Money market rate direction was influenced by N190.89 billion inflows from Nigerian Treasury bills maturities and N10 billion inflow from OMO bills maturities which hit the financial system.

The total inflow reported pushed liquidity position upward in a manner that overshadowed debits for Central Bank of Nigeria (CBN) Treasury bill and FX auctions.

Analysts said average liquidity level for the week settled lower at a long position of N54.08 billion as against long position of N182.54 billion in the previous week.

“We expect the overnight lending rate to trend upwards in the coming week, as funding pressures from the week’s auctions (FGN bond, OMO & FX) will likely offset the expected inflow from FGN bond coupon payments worth N46.44 billion”, Cordros Capital analysts said.

Trading activities in Treasury bills secondary market closed with mixed sentiments, albeit with bullish bias, as the average yield across all instruments pared by a basis points to 7.9%, according to analysts’ notes.

Buying interest spotted in the Nigerian Treasury bills market was attributed to decision by market participants to cover for lost bids at the CBN midweek Treasury bills auction.

Across the segments, the average yield contracted by two basis points and a basis points to 10.3% and 7.3% at the OMO and NTB secondary markets, respectively. READ:Bond Market Reacts to Rate Cut as Yields Plunge to New Low

At the auction, CBN offered bills worth N190.89 billion – N14.27 billion of the 91-day, N25.56 billion of the 182-day, and N151.06 billion of the 364-day – to market participants.

That said, demand at the auction was skewed toward the long-dated bond, although the total subscription level settled lower at N111.94 billion (bid-to-offer 0.6x).

Eventually, the CBN allotted N34.82 billion worth of bills to participants at respective stop rates of 6.47% (previously 6.49%), 7.90% (previously 7.50%), and 13.00% (previously 12.00%).

Following the thin inflows expected in the system next week, analysts anticipate a low demand for T-bills and a slight expansion in yields from current levels.  Last week, the CBN auctioned Nigerian Treasury bills worth N190.89 billion despite the absence of maturing T-bills in the primary market.

Auction results posted showed that stop rates further rose at the longest end of the curve given the low demand amount worth N107.67 billion. The stop rate for the 364-Day bill rose to 13.00% from 12.00%.

# Bonds Yield Hits 13.7% as Market Reacts to False Alarm#