Nigeria’s Fixed Income Yields High, Unsustainable –Investment Firm
The yields on Nigerian fixed income securities have been considered to be on the high side, driven by changing market dynamics.
Given the government’s huge exposures to the local debt capital market, analysts are of the view the current trend is probably unstainable while they expect inflation to begin to recede starting from July, 2024.
With more than N4 trillion already raised by the Debt Management Office (DMO) from the beginning of the year to date, analysts expected borrowing to moderate in the second half of 2024.
The authority has plans to raise N6.3 trillion to support the budget deficit while the Federal Government has initiated a move to raise $500 million US denominated domestic bonds.
The benchmark yield on Nigerian government bonds crossed 19% in July due to rapid selloffs seen across tenors. Fixed interest securities investors showed apathy to local bonds amidst subdued rate.
Bid-offer ratio came tight at DMO auction last month as investors weighed the impacts of high inflation and interest rates on local bonds pricing.
In the secondary market, selloffs also lifted benchmark bond yields with most interest seen on mid-range, according to traders, as investors began to reduce exposure to long dated papers in the market.
Before the auction at the end of the month, the market sentiment remained mixed to bearish in anticipation of higher stop rates.
This sentiment filtered into the auction, as the DMO only allotted ₦225.72 billion despite offering ₦300.00 billion worth of bonds. The total subscription was ₦279.67 billion.
The stop rates for Apr 2029 increased by 25 basis points to 19.89%. Auction results showed that spot rates for Feb 2031 FGN bond rose by 81 basis points to 21% ,and May 2033 bond was issued at 21.98%,+48 basis points above previous auction rate.
Investment banking firm CardinalStone Partners Limited also spotted the bear’s display which continued to rattle the Nigerian sovereign local credit market in July.
Analysts said the sell sentiment was a consequence of the higher-than-expected inflation and the sustained hawkish rhetoric from the Central Bank of Nigeria.
The apex bank raised the benchmark interest rate mildly as inflation jumped to 34.19%, 744 basis points above the monetary policy rate. Benchmark yield on FGN Bond closed at 19.63% in the secondary market.
“Fixed-income yields are high and probably unsustainable; the government appears to be ahead of its 2024 borrowing plans”, CardinalStone said
The investment firm hints that the exchange rate looks relatively stable compared to what the market experienced in the first quarter; and inflation looks set to dip on the impact of the high base effect starting from July.
CardinalStone stated that the reduction in supply at the August bond auction to N190.00 billion across the APR-2029, FEB-2031, and JUN-2033 notes further supports the firm’s recommendation of gradually increasing exposure to long duration and carefully watching the re-investment risks linked with currently attractive short-dated fixed income instruments.
The DMO has planned to raise N300 billion at its monthly auction last month, recording low subscription. “We have concerns about the government’s strategy to finance the N6.3 trillion supplementary budget.
“Specifically, the reliance on sources like windfall tax on banks’ FX-related profits may not be sufficient, leaving legroom for a renewed reliance on CBN deficit financing and domestic borrowing”, the investment banking firm stated.
Analysts recalled that FGN planned to issue a series 1 dollar-denominated FX bond in August 2024, offering $500.0 million, with an indicative yield of 9.5%- 10.0%.
“We expect the bond to have a dual impact, acting as finance for the N6.3 trillion supplementary budget and additional FX inflows to the FX reserves.
“The latter bodes well for the CBN’s capacity to provide FX liquidity support”, the firm said. #Nigeria’s Fixed Income Yields High, Unsustainable –Investment Firm
