Yields Mixed after DMO Crashes Bonds Rates
Yields on Federal Government of Nigeria (FGN) bonds closed on a mixed note after the Debt Management Office, DMO, reduced spot rates on long-dated debt papers.
In the secondary market, the average yield contracted by 8bps to 13.2%, attributed to the dual impact of increased liquidity from coupon payments, and investors’ compensating for lost bids from the primary market auction at the secondary market.
Across the benchmark curve, analysts at Cordros Capital Limited said the average yield contracted across the short (-5bps), mid (-8bps), and long (-15bps) segments.
The sloppy movement was due to the demand on the APR-2023 bond (losing 36 basis points), APR-2032 bond saw buying interest (then yield down 15 basis points), and the APR-2037 bond rally (with a 57bps drop).
MarketForces Africa reported that the DMO held its monthly FGN bonds auction last week where it offered N360 billion for subscription.
The auction result indicated that subscription level or aggregate demand came lower, down by 22.6% across the four instruments as the total subscription level settled at N808.61 billion as against N993.10 billion in the previous auction.
Then, the DMO raised NGN563.36 billion through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037, and 14.80% FGN APR 2049 FGN bonds.
Auction results showed that spot rates for the FGN APR 2032, 2037, and 2049 contracted to 14.75% (from 14.90%), 15.20% (from 15.90%), and 15.75% (from 16.00%), respectively. Meanwhile, the marginal rate for the FGN FEB 2028 expanded to a basis point to 14.00%.
The participation level at this auction declined by -22.6% to N808.4 billion from N991.9 billion recorded in the previous month. DMO has now raised NGN1.9 trillion at its bond auctions from the beginning of the year to date, exceeding its borrowing target by 58.3% in Q1-2023.
Coronation Research said in a note that DMO is clearly on track pro rata to meet the target for the first half of 2023.
There was a slight uptick in the average FGN bond yield following the 50bps hike in monetary policy rate (MPR) hike, according to Coronation Research, noting that MPR – Inflation is currently at -3.9%.
The firm noted that domestic institutions are still the core buyers of the bonds, which accounted for 61.5% of the assets under the management of the Pension Fund Administrator (PFAs) in 2022.
Analysts said some foreign portfolio investors (FPIs) outside the payments pipeline may be tempted back into the market by a little more retracement.
“More likely in our view, the domestic institutions will again make the running and the FPIs will generally stick with less complicated trades with similar (or better) returns elsewhere.
“Looking ahead we expect a small boost to system liquidity due to an FGN bond maturity, NTB maturity, bond coupon payments and an OMO maturity in April and May”, Coronation said.
Analysts stated that these maturities and coupon payments collectively amount to N1.45 trillion, saying a slight moderation in the avenge yield of fixed income instruments is likely.
In H2 2023 liquidity is expected to reduce while domestic borrowing increases, potentially resulting in further upticks in yields. Over the next month, analysts at Coronation expect to see mid-curve FGN bond yields around 13.7% – 14.9% and yields at the longer end of the curve between 13.5% – 15.8%.
