In spite of persistent demand and mounting inflationary pressures, the average yield on Federal Government of Nigeria (FGN) bonds decreased, lowering the actual return on naira assets.
Spot rates on investments in government bills, bonds, and other borrowing instruments are thought to be underpriced even if interest, inflation, and currency rates have been trending higher.
Financial repression was the term used by certain market skeptics. However, Nigerian investment banker and CEO of the Dunn Loren Merrifield Group Sonnie Ayere told MarketForces Africa that the government does not need to pay premiums on risk-free securities.
Following President Bola Tinubu’s market-sensitive inauguration speech, Nigeria’s local debt market observed a rise in demand for gilt-edged securities, reflecting confidence.
According to analysts, investors in FGN bonds could expect to see a change in the yield curve to coincide with shifting market dynamics and the anticipation of significant government borrowing, possibly in the second half of 2023.
In their market note, analysts at Cordros Capital stated, “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.”
Nigeria has always demonstrated a preference for local debt capital market borrowings over pricey eurobonds ever since the global disruption that began in the early months of 2022.
The fight against global inflation has changed interest rate pricing across markets, making borrowing in foreign currencies far more expensive than it was previously in the euro market. According to MarketForces Africa, a significant portion of Nigeria’s state debt is owing to domestic investors, significantly lowering external concerns.
The average yield across all instruments decreased by 10 basis points to 13.9% as a result of the bond market rally that followed President Bola Tinubu’s market-sensitive inauguration speech, according to data from investment banking firms.
Fund/Asset managers continue to allocate money to Nigerian debt papers notwithstanding the negative yield brought on by the inflation risk of government investments. The continuous advance in the stock market was accompanied by buying activity, indicating bullish expectations in the face of increasing inflation, rising interest rates, and declining local currencies.
Numerous market professionals informed MarketForces Africa that, despite lesser risk, investment in the debt market has become less appealing due to growing headline inflation and increased interest rates.
The secondary market for government assets in Nigeria continued to trend upwards last week as investors sought for high-yielding FGN bonds throughout the curve.
Cordros Capital observed that the average yield decreased throughout the benchmark curve in the short (-1bp), mid (-12bps), and long (-8bps) segments. Following bargain-hunting in the bonds due in FEB 2028, NOV 2029, and JAN 2042, respectively, the yield curve started to drop.
The FEB-2028 bond instrument’s yield decreased by 20 basis points as a result of increased demand; the NOV-2029 paper’s yield dropped by 22 basis points, and the JAN-2042 paper’s yield dropped by 18 basis points.
The borrowing rates for the 10-year, 16.29% FGN MAR 2027, and the 15-year, 12.50% FGN MAR 2035 bonds remained steady at 12.53% and 14.81%, respectively, according to Cowry Asset Management Limited analysts who reviewed the market.
The longer end of the yield curve saw positive action when the Debt Management Office (DMO) released a revised bond calendar for the second quarter of 2023, according to the investment banking business.
MarketForces Africa said that the Nigerian debt agency changed the previously provided 2028 FGN bond, 2032 FGN bond, 2042 FGN bond, and 2050 FGN bonds with 2029, 2033, 2042, and 2053 FGN bonds in order to change maturities.
According to Cowry Asset, the 30-year, 12.98% FGN MAR 2050 paper bonds (the 50s bond that was replaced) increased by N0.42, yielding 15.58% instead of 15.66%.
The 20-year, 16.25% FGN APR 2037 bond also increased in value by N0.87, with a corresponding 15 basis point drop in yield to 15.43%.
According to Afrinvest’s monthly report, the performance of the bonds market in May was influenced by a market-stimulating atmosphere that sparked purchasing interest and liquidity as a result of inflows totaling $408.4 billion.
The money market’s inflow was $887.6 billion less than that of April, which had an impact on the secondary market’s average government bond yield falling by 38 basis points to 13.5% for the month.
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.
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