OYIBO EGWUONISO
Bond, treasury bills and commercial papers have become ready alternatives because of their safety and reliability in terms of returns. Analysts say preference for this class of investment in recent times may not just be for the fixed income guaranteed on investments but also for the security this window offers investors assets value. This is in view of vagaries in capital market returns.
Indeed, analysts believe that investors’ huge investments in shares, during the short lived respite that came the way of the capital market in May/June was an indication that there is some elements of liquidity in the investors in spite of the biting global financial crisis.
Armed with their liquid assets, these investors who have proved to be profit seekers and at worst, will want to retain value of the assets, have continued to look for viable and safe investment windows to invest.
However, the capital market as earlier noted is not one of those currently enjoying a good percentage of these liquid assets as the bears have taken over, making the shares less attractive to investors once more.
Not even the foreign exchange market which no longer offer juicy arbitrage gain of N40 per dollar transaction as was the case as at March this year when the disparity between the official and parallel market rates triggered interest, offer the same confidence as the Bond market does these days.
Reasons proffered for such shifts to the bond market is the guaranteed and higher rate of returns bonds offer as against the other investment windows which continues to suffer from market volatility.
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Analysts also attribute the recent developments to the erosion of the huge returns which in the past endeared investors to the capital market.
Before now, investors had a swell time engaging in margin activities and profit taking when share prices were upward swinging until the bears set in around mid 2008.
However, it is no longer news that the tables have turned around in the capital market following the global financial meltdown, and investors being who they are (profit seekers) are bent on hedging against the volatile stock market and foreign exchange market with alternative investments.
Contrary to popular view of bonds as a less profitable security, the evidence is that bonds issued by the federal government of Nigeria may be providing a safe haven for these hedging investors wary of the recent vagaries of the stock market.
What is more, with the rate of oversubscription recorded in the federal government bonds offered by the Debt Management Office (DMO) through the Central Bank of Nigeria (CBN) it is obvious that some investors are indeed taking advantage of the possibility of earning higher and secure returns from bonds.
For instance, throughout the first quarter of the year, the Central Bank of Nigeria (CBN) noted that fixed income segment of investment continued to surge in subscription owing to investors’ flight to safety from the stock segment of the capital market to the government securities (FGN Bonds).
According to it, the bond market remained active with monthly auctions of FGN Bonds continued as 3-, 5- and 20-year tranches were issued in January and subsequently reopened in February and March 2009, in line with the restructuring of the domestic debt profile to longer tenors.
Consequently, a total of N160.00 billion, made up of N60.00 billion 3-year Bond, N60.00 billion 5- year Bond, and N40.00 billion 20-years Bond were floated and allotted, and the total subscription was N277.51 billion during the first quarter of 2009.
The coupon rates ranged from 9.92 to 10.95 per cent for the 3-year Bond, 11.40 to 12.00 per cent for the 5- year Bond and 13.21 to 13.45 per cent for the 20-year bond.
The figures showed renewed interests in this market put against the results in the last quarter of 2008, where FGN Bonds of 3-, 5-, 10 and 20- years were issued with total issue and allotment of N90.00 billion a piece, while the total subscription was N269.17 billion.
The coupon rates were 10.00 per cent for 3-year Bond, 10.50 per cent for 5-year Bond and 15.00 per cent for 20-year Bond.
At the primary market auctions for Nigerian Treasury Bills (NTBs), the CBN’s analysis of the issues showed investors’ preference for longer tenored bills due mainly to the higher returns as well as the need to hedge against interest rate volatility.
For January 2009, the total amount of NTB’s offered and allotted was N115.47 billion, while total subscription was N382.04 billion.
In the preceding month, total amount issued and allotted was N70.00 billion, while public subscription was N251.77 billion.
In January, new issues of 3-year FGN Bonds were offered to the public, while 5-and 20-year FGN Bonds were reopened in January 2009. A total of N50.00 billion, made up of N20.00 billion, 3-year, N20.00 billion, 5-year and N10.00 billion, 20-year FGN bonds were floated and allotted at marginal rates of 9.92, 11.4 and 13.24 per cent, respectively, while total subscription for the issues was N105.20 billion. The impressive subscription, especially for the 20-year tenor, reflected market players’ preference for longer tenored securities perceived to be more stable and attractive.
This may be a result of expert rule that bonds and stocks move in opposite directions, meaning that when stocks go up in value, bonds value falls while when stocks go down in value; bonds go up in their value.
Since the beginning of the year when the national and international economy began to suffer from instability in monetary indicators like the price level, interest rates causing inflationary pressures that has impacted negatively on stock prices and returns, facts reveal that the FGN bonds have been doing well attracting many investors in their bid to hedge their investments.
Following secured rates of 12.33 percent, up from 11.5 percent announced by the Debt Management Office (DMO) for federal government’s auction of N50 billion in 20 years, 5 year and 3 year sovereign bonds investors have not relented in a move to catch in.
However, some experts insists that bonds are vulnerable to economic changes that can undermine their value such as rising interest rates currently witnessed in Nigeria except on few cases of waiting till the tenure date.
Also, plans to own bonds for investment purposes of buying and selling should be checked because rising interest rates cause bond prices to fall and investors become unwilling to pay much at the prevailing high rate of interest.
Aware of these facts, investors may be buying for longer term range as a source at an institutional investment firm said that there is not much choice to invest in equities due to lack of dept in the market.
Some of us have switched a large amount to the bond market; we are also in the money market (excluding treasury bills because the yield is too low) but our equity weighting is low, he said.
Victor Ogiemwonyi, CEO of Partnership Capital told BusinessDay that institutional investors are currently wary of the capital market and even when they invest they are very selective of the stocks they buy into to be able to accumulate small stocks that will become large latter in value. Institutional investors want to achieve prices that will ensure they can make a profit whether they choose to sell or hold, he said.
There is evidence that some investment firms have reduced investments in the stock market by 25 percent in favour of fixed income yields instruments like bonds.
Meanwhile, states in a bid to latch on the increased liquidity going to the bond market have also continued to issue bonds to raise funds for their developmental projects.
For instance, Lagos state in December last year issued a N50 billion bond which was oversubscribed and plans on raising a fresh one this year to finance infrastructure.
Ogun State also submitted a bill of N50 billion bond recently to its state assembly while Imo state issued a N18.5 billion worth of 7 year bonds with a 15.5 percent coupon to finance water and road projects.
Experts believe that stocks generally do well when the economy is booming with increases in consumer buying, companies making more earnings, and investors having more to invest.
Thus, when the economy experiences decline as witnessed currently and stock prices drop as in the Nigerian Stock Market currently, investors easily hedge with the safe interest payments guaranteed by bonds which can be a contributory factor of the increased subscription of the FGN bonds.
Since bonds return a fixed interest payment, they tend to look more attractive when the economy and stocks market decline.
