Afrinvest Limited, a renowned investment banking firm, has reported that Nigeria’s yield curve inverted in the secondary market following auctions and buying interest last week.
Last week, local bond papers surged as disinflation bolstered investors’ optimism about the economy’s outlook, resulting in a rise in secondary market buying interest.
Last week, the primary market saw an unexpected sale of ₦374.749 billion in FGN bonds, despite a lower offer size of ₦190.00 billion from ₦300.00 billion.
At the primary market auction, the Debt Management Office (DMO) reopened naira-denominated bond instruments for three tenors: FGN APR 2029, FGN FEB 2031, and FGN MAY 2033.
The auction drew tremendous interest from investors who placed large wagers on the naira asset, pushing the FGN component of domestic borrowing higher.
In the first quarter of 2024, FGN bonds accounted for 78.6% of domestic borrowing. The overall subscription was at ₦460.18 billion, with a bid-to-cover ratio of 1.23x. Stop rates revealed variable results. The stop rate for the 2029 paper with a lower bid-to-offer ratio ended at 20.30%, according to DMO primary market auction results.
Meanwhile, the stop rates for the 2031 and 2033 FGN bond papers closed lower, at 20.90% (down 10bps) and 21.50% (down 48bps), respectively.
Explaining further analysts said the marginal rate on the longest tenor decreased by 48bps to 21.5%, the rate on the mid-tenor eased 10bps to 20.9%, while weak sentiment on the short end drove the marginal rate up by 41bps to 20.3%.
In the secondary market, trading activities were mixed-to-bullish for the week. Investors demand for bond increased due to improved liquidity in the financial system, supported by FAAC and bond coupon inflows.
The auction details showed that total subscription was spurred by the 7.5x oversubscription on the longest tenor with N50 billion.
Meanwhile, demand was weak on short and mid-dated instruments with bid-to-offer rates of 0.35x and 0.87x respectively for the N70.0 billion offered on each tenor.
In the secondary market segment, average yield across the curve moderated by 6bps week on week to 19.5%, driven by buy interest at the head and the belly of the curve, Afrinvest said in its market note.
The head, demand for debt paper caused yield to decline by 13bps week on week and buying interest at the belly of the curve dragged yield down by 10bps.
“We flagged that the domestic secondary market yield curve is currently inverted, given the relatively higher yield on short-date papers at average of 20.6%, as compared to the mid and long-tenor instruments with average yields of 20.2% and 18.4% sequentially”, Afrinvest told investors in a report.
