Investors demand higher yields as DMO bond sale falters

Investors demanded higher yields on sovereign bonds sold by Nigeria’s debt office on Wednesday, leading to lower allocations than amounts offered before the auction.

The country’s Debt Management Office (DMO) sold N66.5 billion ($322 million) in debt due 2020, 2024 and 2034 on Wednesday, less than the N90 billion offered, according to data on the website of the Abuja-based bond seller.

Yields on the notes due 2024 increased 32 basis points from a January auction to 15.75 percent, according to Bloomberg data.

The under-allocation was highest in the 20 – year 12.1493 percent FGN JUL 2034 bond, with N25 billion offered but only N17.5 billion allocated.

The DMO also received the widest range of bids (between 15 percent and 19.975 percent) for the 20 year bond, a signal of investor’s perception of higher risk premium, especially in longer dated naira assets.

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“Successful bids for the 15.54 percent FGN FEB 2020, 14.20 percent FGN MAR 2024 and 12.1493 percent FGN JUL 2034 were allotted at the Marginal Rates of 15.54 percent, 15.75 percent and 15.85 percent, respectively. However, the original coupon rate of 14.20 percent for the 14.20 percent FGN MAR 2024, 12.1493 percent for the 12.1493 percent FGN JUL 2034 will be maintained while the coupon rate for the FGN FEB 2020 (New Issue) is set at 15.54 percent,” the DMO said in a statement.

Investors have become bearish on Nigeria in the past year as a combination lower oil prices, election uncertainty and insecurity dampen appetites for assets in Africa’s biggest oil producer.

Oil prices which account for 95 percent of the country’s dollar earnings are down 53 percent since June 2014.

The local currency the naira retreated 1 percent to N205.89 per dollar by 1:15 p.m. in Lagos on Thursday, after earlier falling to N206.32, an all-time low.

The NSE- ASI the major stock benchmark has lost 19.3 percent (Feb 12), while the Meristem bond index is down 11.02 percent in the year to February 10.

“Investors are watching the elections very anxiously and many view political risk in Nigeria as the key area of focus for 2015.  Investors do not have a preference for any one side,” Razia Khan, Head Africa macro and global research at Standard Chartered, said in an email response to questions.

“What they are most hoping for is a smooth election process that reduces any uncertainty.  From this perspective, a more contested election, especially if the result is open to challenge, would sit uneasily with most investors.”

About 68 million people are registered to vote, while the shoddy distribution of new voters cards mean a third of registered voters are yet to receive them (according to the electoral body INEC), contributing to investor angst over the vote.

According to Khan the challenges posed by the weaker oil price are almost a secondary consideration for now.

Nigeria’s foreign reserves dropped to $33.87 billion by February 5, down 20 percent from a year ago, as the central bank struggled to meet demand for dollars caused by an outflow of funds from the country.

Pension funds in Africa’s largest economy have increased their exposure to Federal Government securities as foreign investors retreat.

Pension Fund Assets in FGN bonds have increased to 51.97 percent of total assets in December 2014, compared to 49.96 percent in October, according to latest data from the regulator PENCOM.

Foreign Exchange (FX) trading restrictions introduced in December, by the Central bank has also hurt investor sentiment towards the country, with daily interbank liquidity dropping to an average of $300 million.

“When the FX net open position of Nigerian banks was at 20 percent of shareholders’ funds in 2008, daily FX turnover in Nigeria was probably as high as $1bn,” Samir Gadio Head, Africa Strategy FICC Research, told BusinessDay.

“These FX liquidity figures are very low for an economy of the size of Nigeria. For example, South Africa’s spot FX market trades between $2bn and $4bn a day.”

PATRICK ATUANYA