Nigeria’s bond market slumps as investors bail out on risk

Investors unnerved by fears that the commitment of major global central banks to quantitative easing (QE) is waning, took their exit from the Nigeria bond market yesterday causing the market to take a hit as yields spiked and prices slumped.

The slump comes amidst global markets sell-off that analysts say encompassed nearly all major asset class, after the Japanese central bank failed to address recent volatility.

“Yields have been rising in the past couple of weeks in the market, as offshore interest has waned,” Babatunde Adama, chairman, FX dealer’s workgroup at the Financial Markets Dealers Association, (FMDA) tells BusinessDay.

Analysts who spoke to BusinessDay yesterday, also hinted at the current low demand in the market as part of the trigger to the slump.

A bond trader who pleaded anonymity told Business Day that a lot of factors affected the bond market on Tuesday. It seems the nervousness of domestic investors anticipating a broad sell off by foreign investors reached a high Tuesday, thus leading to some panic sell downs by the locals.

He said “On one hand, the sell down panic was also exacerbated by brokers who have reached their stop loss limits and need to exit ahead of further losses. There are also mixed signals about the activities of Foreign Portfolio Investors (FPIs).

“There was speculation about

some foreign banks selling down on their positions on behalf of investors. In such times, nobody wants to be caught in the market unawares, thus leading to a spiral with more selling pressures,” he told BusinessDay.

He said overall, these sentiments had an effect on trading, as there was no effective two-way quote since there were more participants trying to offload positions than seeking to buy.

“The real test of trading sentiments will be gauged in Wednesday’s (today) auction where the DMO will be offering three maturities of about N85 billion to the market. Yields on the FGN debt due April 2015 which is one of the three maturities being auctioned closed at 14.19% on Tuesday. Yields on the FGN Notes due April 2017 and July 2030 closed at 14.59% and 13.10% respectively on Tuesday. However, this could also signal a good re-entry point for some investors, as these yields seem pretty attractive, especially when you consider the fact that the equity markets (specifically real sector stocks) may be in bubble territory and the money market is offering lower returns”.

The yield curve shifted an average of 50 basis points bps upward, with the most pressure on short-tenored notes.

Yields on domestic bonds due January 2022 rose to their highest since last October’s addition of Nigerian bonds to JPMorgan’s emerging market bond index, according to data compiled by the FMDA.

The yield on the 2022 securities rose 89 basis points yesterday, or 0.89 percentage point, to 14.70 percent, according to the FMDA data. The price of the 16.39 % FGN JAN 2022 yesterday fell to 108.08 from 112.75 on Monday.

Nigerian bonds have returned minus 0.6 percent year to date, according to data from the Access Bank, FGN bond index. The total foreign portfolio inflow in the system is equivalent to 25 percent of current dollar reserves of $48.4 billion, with about 10 percent of that in fixed income and 90 percent in equity, the CBN Governor Sanusi Lamido Sanusi said last month.

The fears that the QE, which had buoyed global markets, and sent a wall of liquidity to frontier fixed income markets like Nigeria, is ending, has put pressure on the naira exchange rate which is exacerbated by falling oil prices.

The naira, which strengthened 3.9 percent against the dollar last year and was the continent’s best performer, has retreated 1.8 percent this year to N159 per dollar.

Brent crude was off $1.79 to $102.16 a barrel by 1345 GMT yesterday, having sunk to $101.82 in earlier trade. U.S. oil shed $1.33 to $94.44. Increasing oil supplies and waning demand in China, the -world’s number two oil consumer- are likely to hold down prices, analysts say.

The Nigerian Stock Exchange (NSE) all share index was up 271.81 points, or 0.69 percent.

According to investment analysts at FBN Capital, “FGN bond yields widened by up to 150 basis points (bps) last week. Pressure on the naira exchange rate developed, leading to direct CBN intervention, amid anecdotal evidence of an exit by some offshore investors. The background is the fear that the latest era of cheap money is close to its end, with the reversal of the quantitative easing (QE) in developed economies, led by the US.”

Yesterday’s decline in global markets was led by a sharp fall in the dollar which followed the Bank of Japan’s decision not to take any fresh measures to tackle rising government bond yields that threaten to thwart its $1.4 trillion stimulus programme.

The action sparked a further reversal of bets on stocks, emerging-market debt and other assets bolstered by accommodative monetary policies. Bond traders note that some of the more active portfolio investors may exit frontier markets such as Nigeria.

“Our take however is that the tracker funds in the JP Morgan ‘family’ have a longer term investor horizon, and investors generally (domestic and foreign) will increasingly buy into the attractive inflation story,” they added.

The Monetary Policy Committee, led by Governor Sanusi Lamido Sanusi, has kept its benchmark interest rate unchanged at a record high of 12 percent since October 2011 to bolster the naira as inflation accelerated to 9.1 percent in April from 8.6 percent a month earlier, according to data from the National Bureau of Statistics (NBS).

The recent fall in bonds which has seen yields spiking, has sent Nigerian borrowing costs to 8 month highs, threatening to increase financing costs for the nation’s growing debt pile.

The Debt Management Office’s (DMO), recently announced plans to change the composition of Nigerian debt to a higher level of foreign debt vis a vis domestic debt stock which can be explained by the rising burden of domestic debt service in recent years, compared to external borrowing.

The FG earmarked N543 billion, for domestic debt service in 2013, according to data from the federal budget. Domestic debt service accounts for 14.4 percent of total federal retained revenue in the 2012 budget, and as much as 31.7 percent of the non oil component of the total.

Debt service payments have spiked from below N200 billion a year in 2007, to over N550 billion in 2011.

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 2.17 percent of gross domestic product (GDP) in 2013, down from 2.85 percent in 2012. Total debt may reach 14.8 percent of GDP this year.