Yields Mixed As DMO Pulls Down Bonds Rates

Federal Government of Nigeria (FGN) bond yields ended mixed after the Debt Management Office, DMO, lowered market rates on long-dated debt securities. The average yield in the secondary market fell by 8 basis points to 13.2%, owing to the twin impact of greater liquidity from coupon payments and investors compensating for missed bids from the main market auction at the secondary market.

According to Cordros Capital Limited analysts, the average yield declined throughout the benchmark curve in the short (-5bps), mid (-8bps), and long (-15bps) sectors. The disorderly change was caused by demand for the APR-2023 bond (which lost 36 basis points), buying activity in the APR-2032 bond (which saw its yield fall 15 basis points), and a rebound in the APR-2037 bond (with a 57bps drop).

Last week, the DMO launched its monthly FGN bonds auction, offering N360 billion for subscription. The auction result showed that subscription level or aggregate demand fell by 22.6% across the four instruments, with the overall subscription level settling at N808.61 billion as opposed to N993.10 billion in the previous auction.

The DMO then raised NGN563.36 billion by reopening the FGN bonds with yields of 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037, and 14.80% FGN APR 2049. Spot rates for the FGN APR 2032, 2037, and 2049 fell to 14.75% (from 14.90%), 15.20% (from 15.90%), and 15.75% (from 16.00%), respectively, according to auction results. Meanwhile, the FGN FEB 2028 marginal rate increased by one basis point to 14.00%.

This auction’s participation dropped by -22.6% to N808.4 billion, down from N991.9 billion the previous month. At the beginning of the year, DMO has raised NGN1.9 trillion through bond auctions, surpassing its borrowing target by 58.3% in Q1-2023. According to a note from Coronation Research, DMO is obviously on pace to fulfill the objective for the first half of 2023.

According to Coronation Research, there was a small increase in the average FGN bond yield following the 50bps raise in monetary policy rate (MPR), adding that MPR – Inflation is now at -3.9%.

Domestic institutions continue to be the primary buyers of bonds, accounting for 61.5% of 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%.