Offshore Sell off, FG Issuance Seen Taking Yields to 15%

Sell off by investors in response to rising U.S yields, federal government issuance and repatriation by investors ahead of forthcoming elections are combining to send yields higher and analysts see it hitting 15 percent.

Last week, performance in the T-Bills market was bearish, as a result average rates across all tenors advanced 20basis points (bps) to close at 12.40 percent. Major selloffs were recorded across the short – 5-July-2018 (+64bps), medium – 6-Sep-18(+13bps) and long term- 3-Jan-18 (+34bps) maturities.

“The bearish run in the bonds market was sustained last week following selloffs by local and offshore investors. Consequently, yields advanced 13bps W-o-W. Local Pension Administrators were the majority players in the bonds market last week with major selloffs witnessed across the Mar-2027 and Jul-2034 instruments,” Investment firm Afrinvest said in a note to clients.

“In the near term, we expect a sustenance in the bearish sentiment leading to an appreciation in yields in the bonds market. This is against the backdrop of Federal Government’s need to fund the 2018 budget as well as continued sell-offs by offshore investors ahead of 2019 general elections.”

Nigeria 2018 budget has deficit of about N1.95 trillion, of which the financing plan of the budget, as articulated in the budget document includes the sum of N1.64 trillion of borrowing, made up of N793 billion domestic debt and N849 billion foreign debt.

“Bond yields have inched up from early May yield-lows on recent selling by local and foreign investors and are now look closer to neutral historical levels. Although further decline in inflation, likely MPR cuts this year and muted bond supply could support the long end of the curve, we think renewed significant duration gains will be constrained by the more subdued pension fund bid for bonds, the absence of GBI-EM inclusion and limited potential for yield downside at the short end,” Samir Gadio, Head, Africa Strategy, FICC Research at Standard Chartered Bank told BusinessDay in an email response.

Wale Okunriboye, Head, Investment Research at Sigma Pensions cited two major drivers of fixed income yield in the past few weeks;

“First, it is offshore driven, as foreign investors are repatriating from Nigeria ahead of the election. Another leg is the Selloff seen across emerging and frontier market globally in response to rising US yield. We are already in Q3 and closer to the elections in 2019, if they really want to exit Nigeria, they will do that now.”

The opinion of another Lagos-based analyst was not different as he pointed out the same determinants of the rising yields.

“The current trend we see in the fixed income market especially with the bond is driven by two things which are; the rising yields in the international market, and the other driver is the fact that the federal government will issue bonds to fund the budget deficit. We are going to have a large budget deficit in Nigeria this year, and that money will have to be funded from bond issued in both the domestic and foreign market,” Ayo Akinwunmi, Head of Research at FSDH Merchant Bank told BusinessDay in a phone response.

Meanwhile, the plan to redeem all Nigeria Treasury bills (NTBs) maturing in December last year and a halt in Open Market Operation (OMO) bill issuances by the central bank were the combining drivers that sent yields to their lowest since 2015 earlier in the year.

The CBN conducted OMO auction once last week- on Monday in a bid to mop up the excess liquidity in the system (N841.9bn positive) ahead of expected Federation Accounts Allocation Committee (FAAC) inflows and OMO maturities.

“However, investors’ bearish sentiment towards the OMO auctions witnessed in recent times was sustained as the auction was 84.3 percent jointly undersubscribed – albeit 38.0 percent higher than the previous week’s undersubscription rate. Investors’ weak appetite was on the back of more attractive investment options in the secondary market,”Afrinvest said.

Akinwumi of FSDH Merchant Bank concluded by forecasting a yields touching 14.5 percent but also stressed that yields may likely fall afterwards considering some large investors are getting ready to enter the market.


Source: Business Day

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