Sell Pressures Hit FGN Bonds, Market Demand Falls by 67%
The Federal Government of Nigeria (FGN) bonds face pressures in the secondary market on Monday as fixed income investors – asset/fund managers and some pension fund administrators – offload part of their portfolios amidst uncertainties in the market.
As a result, the average yield expanded by 11 basis points to 13.93% after the Debt Management Office (DMO) failed to meet its monthly borrowing target as investors’ demand at its primary market auction slumped by about 67%.
The inflation rate has weakened the return on fixed interest securities amidst a tightening policy rate. Foreign portfolio investors’ apathy for Nigerian bonds is supported by the fact that interest yield on naira assets remains negative.
Yesterday, the bears had the upper hand in the bond market, CardinalStone said, evinced by selling pressure, particularly at the belly of the curve (+37 bps). Traders said the highlights of the market were the APR-2032 and JUL-2030 bonds, whose yields increased by 85 and 47 basis points to close at 14.70% and 14.26%, respectively.
However, losses were observed in the mid-term notes, particularly in the 23 JUL 2030 bond, leading to an expansion in the average secondary market yield to 13.54% (from 13.43%).
Notably, the 10-year borrowing cost yielded around 14.26% (from 13.79%), while the 20-year and 30-year papers held steady at 15.19% and 15.30%, respectively. Elsewhere, FGN Eurobonds saw appreciation across all tracked maturities, driving the average secondary market yield lower to 11.22%.
At this month’s bond auction, Nigeria’s debt agency offered instruments worth N360.00 billion to investors through re-openings of the 14.55% FGN APR 2029. The stop rate on the instrument settled at 13.85%.
Also, 14.70% FGN bond JUN 2033 stop rate was 15.00%, 15.45% FGN JUN 2038 earned a stop rate of 15.20%, and 15.70% FGN JUN 2053 stop rate was 15.85%. Demand was lower across the four instruments as the total subscription level settled at N312.56 billion, a significant decline from N945.14 billion in the previous auction.
After the auction, DMO announced it allotted bonds worth N230.26 billion (including non-competitive allotments of N2.50 billion), resulting in a bid-to-cover ratio of 1.4x. Analysts expect yields in the FGN bond secondary market to remain elevated in the medium term, driven explicitly by an expectation of a sustained imbalance in the demand and supply dynamics.
However, analysts highlight that deliberate actions by the DMO to keep the cost of borrowing moderate remain a downside factor – this has kept foreign investors to maintain distance from the local market.