Nigeria Eurobond Slumps after CBN Resumes OMO Auction

Nigeria Eurobond Slumps after CBN Resumes OMO Auction

Nigeria’s foreign currency denominated bonds fell as markets continue to weigh uncertainties in the local economy, both twin evils of inflation, and interest rates continue to surge with a bleak outlook on GDP growth.

Despite rising pressures on government finances, the Debt Management Office has shifted focus on the local debt capital market for borrowings, noting that eurobond raise has remained expensive.

Nigeria is struggling to curd debt service costs, and the authority has been borrowing from the local market at cheaper rates despite running inflation, and interest rates. The negative interest on naira assets kept foreign investors away from buying naira assets.

However, the Central Bank of Nigeria has recently resumed open market operation (OMO) bills at higher rates to attract foreign investors into the economy – first time in 2023.

Foreign portfolio investors are torn between positioning in the OMO market and holding FGN Eurobond on an expectation that the apex bank will continue to offer attractive rates to drive US dollar inflows into Nigeria.

On 10 August, the CBN auctioned its first OMO bills since 29 December 2022. Despite the high subscription level relative to the offer, the stop rates averaged 12.49% across the 96-day (10.00%), 187-day (12.98%), and 362-day (14.49%) bills.

Cordros Capital Limited said in an update that this was exceptionally higher than 8.50% mean level at the December 2022 auction.

“Although it is still in the early stages, we think this auction represents one of the short-term fixes for the CBN to attract FPIs into the market amid concerns that the Treasury bills yields are too low to attract foreign investors.

“Whilst we are cautiously optimistic that active OMO operations with competitive interest rates will complement recent FX reforms and may be a short-term fix needed to bring FPIs back to the FX market, the preceding suggests a bifurcation of interest rates where rates are high for foreign investors (OMO bills) but low for domestic investors (Treasury bills)”.

Analysts anchor the view on DMO’s efforts to keep borrowing costs low. They said bringing back OMO as a tool for attracting foreign investors takes the market back to the unorthodox monetary policy era.

“It will come at a considerable cost to the CBN’s balance sheet”, Cordros Capital said.

Elsewhere, CardinalStone Securities reported that activities in the secondary sovereign bond market were also bearish as investors priced yield higher in line with yesterday’s bond auction.

Notably, sell-offs were focused in the belly of the curve, with the APR-2029 bond seeing most of the pressure Overall, the yield across the curve expanded by 10 basis close at 13.7%.

Across the benchmark curve, the average yield was flat at the short end but expanded at the mid (+13bps) and long (+9bps) segments due to profit-taking on the APR-2029 (+33bps) and JUN-2053 (+64bps) bonds, respectively.

The 10-year and 30-year bonds retained their yields at 13.63% and 15.30%, respectively, Cowry Asset Management told investors in an update. In the international debt market, Eurobonds faced persistent depreciation, leading to an average secondary market yield expansion to 11.76% from 10.17%. 

On Tuesday, Brent crude fell 1.92% to $84.56 per barrel, while WTI crude lost 2.59% to $80.37 per barrel.  Oil futures were lower amid rising demand concerns stemming from dismal economic data from China, which outweighed supply constraints. #Nigeria Eurobond Slumps after CBN Resumes OMO Auction

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