Firm Sees Nigeria Bond Yield Hitting 18.6% in 3-Month
In the next three months, the yield at the longer end of the curve for Federal Government of Nigeria (FGN) bonds could escalate to 18.6%, an investment firm reacting to a primary market auction conducted by the Debt Management Office.
The DMO recently sold FGN Bonds as part of an effort to close the government financing gap by borrowing from the local debt market.
The authority offered N360 billion to investors; and authorised dealers but raised N418.2 billion through re-openings of the 16.29% FGN MAR 2027, 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2033, 15.45% FGN JUN 2038.
In its market update, Coronation Research, an arm of Coronation Merchant Bank told investors via email that the bids were allotted at the marginal rates of 15.00%, 15.50%, 16.00%, and 16.50% respectively.
According to the firm, the bid-to-cover ratio stood at 1.45x compared to 3.24x recorded in the December auction.
The strong demand at this auction primarily reflects system liquidity which was supported by inflows from FAAC allocation and coupon payments. Notably, market liquidity was reported at N210.4bn on Friday, the working day before the bond auction.
Call, overnight, and repo rates closed within a range of 7% – 19% as rates in the money market moderated. There was significant demand for longer-tenured bonds, such as the JUN 2038 bonds with N90 billion offer size recorded N311.9 billion subscription while N266.7bn was allotted.
Coronation Research said domestic institutions were the core participants at the auction.
According to the latest monthly report by the National Pension Commission (PENCOM), FGN bonds held by pension fund administrators as of the end of December 2023 increased by 24.2% year on year to N11.5 trillion from N9.2 trillion.
The PENCOM report shows that FGN bonds accounted for 62.4% of total assets under management (AUM). December’s headline inflation increased by +72 basis points to 28.92%.
“We expect to see another uptick when the NBS releases its January figure”, the firm said, adding that its view is partly hinged on exchange rate volatility which is contributing to higher prices for imported goods.
It noted the insecurity in specific regions is disrupting supply chains, leading to shortages and increased costs for essential goods. Rising fuel prices, influenced by changes in the global oil market, are having downstream effects on transportation and production costs.
Coronation Research anticipates continuous monetary policy tightening, given elevated inflation levels as the monetary policy committee is scheduled to hold a meeting in February.
“Based on the FGN 2024 Budget, the fiscal deficit is estimated at N9.1 trillion which is 3.88% of the 2024 estimated nominal GDP. The deficit is expected to be financed by new borrowings of N7.8 trillion. The sum was split as N6.1 trillion from domestic sources and N1.8 trillion from external sources.
“We expect domestic fixed income yields to remain elevated. For FGN bonds, we currently see yields at the mid-curve around 15.9% -16.3% and between 16.6% – 18.6% at the longer end of the curve over the next 3 months”, Coronation Research stated. #Firm Sees Nigeria Bond Yield Hitting 18.6% in 3-Month#
