Yield Tracks Below 14% as FGN Bonds Rally
The average yield on Federal Government of Nigeria (FGN) bonds declined amidst a sustained demand even as inflation pressures bite, weakening real return on naira assets.
Though interest, inflation, and exchange rates have trended higher, spot rates on investment in government bills, bonds, and other borrowing instruments are considered underpriced.
Some market critics called it financial repression. However, Sonnie Ayere, a Nigerian investment banker, and Chief Executive Officer of Dunn Loren Merrifield Group told MarketForces Africa government needs not to pay premiums on risk-free instruments.
Reflecting optimism, Nigeria’s local debt market saw an increase in demand for gilt-edge instruments following a market-sensitive inaugural speech by President Bola Tinubu.
Analysts said FGN bond investors expect to see a shift in the yield curve to align with changing market dynamics and the expectation of large borrowings by the government – perhaps in the second half of 2023.
“We retain our view that frontloading of significant borrowings for the year by the FG will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply”, analysts at Cordros Capital said in its market note.
Since the global disruption that started last early in 2022, Nigeria has continued to show a preference for local debt capital market borrowings over expensive eurobond.
Global inflation fighting has shifted interest rate pricing across the markets, making foreign currency borrowing much more expensive than previously seen in the euro market. MarketForces Africa reported that large numbers of Nigerian public debt are owed to local investors, reducing external risks strongly.
Consequent to the bond market rally seen after a market-sensitive inaugural speech by President Bola Tinubu, the average yield across all instruments contracted by 10 basis points to 13.9%, according to investment banking firms reports.
Despite negative yield due to treasury investment inflation exposure, funds/Assets managers are still allocating funds to Nigerian debt papers. Buying momentum played concurrently with the ongoing rally in the equities space, signifying positive expectations amidst rising inflation, interest rates, and falling local currency.
A slew of market analysts told MarketForces Africa that rising headline inflation and higher interest rate have reduced the allure of investing in the debt market, resulting in negative real return, albeit, lower risk.
Last week, Nigeria’s secondary market for government securities continued on a bullish note, as market participants sought out high-yielding FGN bonds across the curve.
Across the benchmark curve, Cordros Capital noted the average yield declined at the short (-1bp), mid (-12bps), and long (-8bps) segments. The decline in the yield curve followed bargain hunting in the FEB-2028, NOV-2029, and JAN-2042 bonds, respectively.
Higher demand for FEB-2028 bond instrument dragged its yield downward by 20 basis points, the same pattern spotted on the NOV-2029 paper which shed 22 basis points and JAN-2042 declined by 18 basis points.
In its market brief, analysts at Cowry Asset Management Limited noted that the borrowing costs for the 10-year, 16.29% FGN MAR 2027, and the 15-year, 12.50% FGN MAR 2035 bonds remained unchanged at 12.53% and 14.81%, respectively, as traders adopted a cautious stance.
According to the investment banking firm, the longer end of the yield curve experienced bullish activity following the release of a revised bond calendar for the second quarter of 2023 by the Debt Management Office (DMO).
With the intention to shift maturities, MarketForces Africa reported that Nigeria’s debt agency replaced previously offered bonds: 2028 FGN bond, 2032 FGN bond, 2042 FGN bond, and 2050 FGN bonds with 2029, 2033, 2042, and 2053 FGN bonds.
In particular, the 30-year, 12.98% FGN MAR 2050 paper bonds (the 50s bond that was replaced) gained N0.42, yielding 15.58% from 15.66%, according to Cowry Asset.
Similarly, the 20-year, 16.25% FGN APR 2037 bond appreciated by N0.87, accompanied by 15 basis points decline in its corresponding yield to 15.43%.
In the month of May, the bonds market performance was guided by a market-stimulating sentiment that spurred buying interest and liquidity following inflows worth ₦408.4 billion, Afrinvest said in its monthly report.
The inflow into the money market was ₦887.5 billion less than April inflows, which influenced a decline in average sovereign bond yield by 38 basis points in the month to 13.5% in the secondary market.
Meanwhile, Afrinvest noted that the FMDQ/S&P Nigerian Sovereign Bond index rose 1.0% month on month, saying that short-term bonds recorded the most demand across tenors as average yields pared 282 basis points.
The yield on mid-dated bonds closed flat and long-dated bonds saw an average yield rise of 15 basis points in May 2023, according to the investment banking firm’s market report. In line with its calendar, the DMO offered 2028, 2032, 2042, and 2050 sovereign bonds at ₦90.0 billion apiece at the primary market.
All the instruments were undersubscribed, save 2050 FGN bond instrument which achieved a bid-to-cover ratio of 3.8x, though allotment stood below bid levels, according to analysts’ note.
Compared to the April auction, marginal rates increased by 10 basis points apiece for the 2028 and 2032 instruments to 14.1% and 14.9% respectively, rate on the 2042 bond trended higher by 29 basis points at 10.95% while 2050 remained sticky at 15.8%.
This month, analysts said they anticipate a minute liquidity inflow worth ₦354.4 billion to hit the domestic bond space which would partly be mopped up by the reopening of the APR 2029 and new issuance of the JUNE 2033, 2038, and 2053 FGN bonds.
“…we expect a muted performance following repressed liquidity and investors staying on the sideline ahead of the auction”, Afrinvest projected. # Yield Tracks Below 14% as FGN Bonds Rally > Naira Steadies as Banks Issue Update on FX Purchase