The rally of Nigeria’s FGN bonds is expected to continue in the medium term as Barclays adds it to its emerging market bond index this March.
Barclays announced last November that it expected approximately $14 billion in Nigerian debt to become eligible for its emerging market government bond index at the end of the first quarter of 2013.
Nigerian bonds have rallied since mid 2012 on the back of Barclays and JPMorgan’s announcement of index inclusion.
Specifically, the Access Bank bond index has rallied by 29.1 percent year to date. Last week at the secondary market, a renewal of interest in government securities led to an increase in bond prices, which moved by more than 30 basis points on the average.
However, there was a reversal later in the week as traders repositioned for end-of-month profit taking and on the back of an expected liquidity tightening, prompted by maturing OMO bills worth about N231.31billion “In our opinion, the decline in prices may not be sustainable, given that the inclusion of FGN bonds in the Barclays emerging market bond index will take effect this month,” said Dunn Loren Merrifield bond analysts in a research note released Monday.
Nigeria will become the second sub-Saharan African country to be added to the Barclays Emerging Markets Local Currency Government Index following steps by the country to increase access to its bond market.
The inclusion comes after Nigeria entered the JP Morgan Government Bond Index – Emerging Markets (GBI-EM), which is expected to bring up to $1.5 billion into one of the continent’s most developed debt markets.
Nigeria will become the 21st member of the Barclays index from March 2013 after meeting requirements relating to market size and openness, Brian Upbin, head of benchmark index research at Barclays said last year.
“The first criterion for index inclusion is that the market has to be classified as an emerging market,” Upbin said. “Then we look at market size. There has to be at least $5 billion in debt outstanding. We also evaluate investability and market accessibility.”
Nigeria’s projected weight would be about 0.8 percent based on its total debt outstanding, as the index is a market value weighted index South Africa, which joined the index on its launch in 2009, has a weight of 5.6 percent.
Fixed rate Nigerian bonds with at least one year to maturity and with a minimum size of N100 billion will be eligible for the index, Upbin said.
Analysts said the index announcement should add to the positive momentum for Nigerian bonds and enhance their appeal to foreign investors.
“This suggests Nigeria is increasingly perceived as a debt market that cannot be ignored anymore by global investors looking for high-yield assets,” said
Samir Gadio, emerging markets strategist at Standard Bank, London.
The yield on the country’s 16.39 percent domestic bonds due January 2022 declined two basis points to 10.60 percent in the secondary market, according to Monday’s data compiled on the Financial Markets Dealers Association (FMDA) website.