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Low rates to linger for longer as Q1 bond issuance target falls below expectations

There are indications that a reversal of the low interest on tradable instruments, particularly bonds, might not happen any time soon after the Federal Government disclosed it would issue bonds at an amount that is less than what the market is expecting which could see demand outstrip supply.

The Q1 Bond issuance calendar released by the Debt Management Office, Thursday, shows the Federal Government would raise bonds worth between N360 billion to N450 billion over the next three months to fund the budget deficit.

Market players were anticipating a higher amount, given that about an estimated N505bn inflow is expected to hit the market in the form of bond coupons.

That’s excluding about N50 billion inflows from Retired Saving Accounts, signalling interest rates on bonds will trend further lower.

Read Also: Budget deficit: Lagos State eyes N100bn bond issuance

What will happen invariably is that demand will be higher than supply and this will further bring down already low-interest rates, according to Ayodeji Ebo, senior economist/head, research & strategy, Greenwich Merchant Bank.

“The excess liquidity from unsuccessful transactions will also find its way into other viable instruments. I am not expecting any significant increase in the clearing rates in the first quarter of the year ” Ebo said.

An inverse relationship exists between the price of a bond and the interest on the bonds hence, when bond prices increase, interest rate will fall and vice versa.

With the high demand for the long dated instrument, it is expected that interest rates will fall.

A further breakdown of the issuance calendar shows that the bonds will be issued at three different time intervals, on the 20th of January, 17th of February and 24th of March.

The January bond auction circular with a total of N150bn to be issued via the re-issuance of the FGN 2027s, 2035s and 2045s papers (N50bn a piece). The same applies to the February and March auctions.

The coupon on the 2027 bond was put at 16.2884 percent, while that of the 2035 bond and 2045 was put at 12.50 percent and 9.80 percent.

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