Investors’ appetite for Federal Government of Nigeria (FGN) bonds appears to have waned as the Debt Management Office (DMO) records the lowest bids for bonds on offer at its most recent monthly auction held last week.
The DMO sold N35 billion each of 5- and 10-year bonds, raising N70 billion ($440m) from a total bid of N132 billion at its regular debt auction last Wednesday. This compares with the N105 billion of 5-, 7-, 10- and 20-year bonds, sold in February with total bids of N251.9 billion.
“We detect a cooling of interest among offshore investors,” said FBN Capital research analysts, in a note released Friday.
Last week’s sales by the DMO were the lowest in the quarter, which might be a reflection of the recent approval of the 2013 budget.
The Federal Government has plans to issue approximately N528 billion worth of new bonds in 2013 (excluding rollovers to refinance maturing issues), compared with the N752 billion issued in 2012, according to data from the present budget proposals.
The development in the bonds market may not be unconnected with rallies in the equities market and some macro-economic indicators. The nation’s inflation rate fell to 9 percent in January, from 12 percent in December, the lowest level since April 2008, the National Bureau of Statistics (NBS) said last month.
Samir Gadio, an emerging markets strategist at Standard Bank London, notes that, “pension funds feel that single-digit yields are not representative of Nigeria’s long-term double-digit inflation path and most likely pushed up rates in recent days, as the foreign bid receded.”
FGN bond yields have not broken the 10 percent threshold (in spite of single digit inflation) and have trended upwards lately with the January 2022s reaching 11.3 percent on March 8.
The yield on Nigeria’s 10-year domestic bonds due 2022 closed at 11.27 percent, according to Thursday prices on the Financial Markets Dealers Association (FMDA) website.
This is despite the favourable CPI outlook for Q1:13 (9.7% and 9.3% projected for February and March), the expectation for more subdued issuance volumes from March and the forthcoming inclusion of selected maturities in the Barclays Emerging Markets Local Currency index, Gadio said.
The rebound in secondary market rates at the long end probably also mirrors the less supportive risk momentum that may have pushed some offshore investors to lighten up duration and/or reallocate funds to the short end, Gadio said.
Domestic fixed income investors may also be cautious as they still remember the painful losses incurred in 2010, as the yield curve shifted up sharply following a period of qualitatively low rates.
Analysts say institutional investors and Pension Fund Administrators (PFAs) are lightening up on bonds and moving into equities (where they are mostly underweight), after the strong rally in bonds.
Nigerian bonds have rallied since mid 2012 on the back of Barclays and JP Morgan’s announcement of index inclusion.
The Access Bank Nigerian Government Bond Index, which tracks all FGN bonds publicly issued through the DMO and being traded under the Primary Dealer/Market Maker (PDMM) trading guidelines, has gained 27.18 percent year-to-date (ytd).
Total returns include capital gains, accrued interests and coupon reinvestments. This compares with a 17.74 percent gain in the Nigerian Stock Exchange All Share Index.
FGN bonds made up 61.44 percent of the domestic debt stock of N6.5 trillion at the end of 2012.
Nigeria’s budget deficit is forecast at about 1.85 percent of GDP in 2013, down from 2.85 percent in 2012. Total debt may reach 14.8 percent of GDP this year.
Analysts expect the Monetary Policy Committee of the CBN will maintain the MPR unchanged at 12 percent at the 18/19 March meeting. “The party for fixed income investors in Nigeria is almost over in our view,” said FBN Capital analysts. “But they could enjoy a further 100 basis points in yield compression by the end of H1 2013 on falling headline inflation.”
PATRICK ATUANYA
