Narrowing of bond yields, more to come

The Debt Management Office (DMO) held its fourth monthly auction of FGN bonds of the year last week, and sought to raise N50 billion ($310m) from the sale of two staple reopened issues, the 13.05 percent August ‘16s and the 14.20 percent March ‘24s. It secured a total bid of N183 billion.

The marginal rates (effective cut-off points) narrowed at the auction by 95bps and 110bps from the previous month to 13.15 percent for the ‘16s and 13.10 percent for the ‘24s.

There has been a high level of liquidity in the market in recent weeks. The last two auctions of NTBs by the Central Bank of Nigeria (CBN) on April 9 and 23, attracted total bids of N535 billion, the largest for more than one year, and N680 billion, respectively. The CBN has conducted just three open market operations (OMO) in April.

The PFAs have been substantial buyers of paper, given the modest level of OMOs and some large maturities of NTBs.

The offshore portfolio investor has also returned to the domestic debt markets, which we can see from the relative calm in forex markets. Tapering by the US Federal Reserve has not led to a flight from all emerging/frontier markets but has restored the chase after yield. The return on the March ‘24s is 450bps above that on the equivalent South African government issue.

The Nigerian credit story has not fallen apart in the run-up to the elections due in February 2015. The FGN deficit for January amounted to N105 billion, and the 2014 budget projects a full-year figure of N912 billion.

These trends point to further yield narrowing and we see a decline along the FGN bond curve to a range of 12.50 percent to 13 percent in the weeks ahead.