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Nigeria’s Federal Government bonds encountered challenges in the secondary market on Monday, as fixed income investors, including asset/fund managers and some pension fund administrators, opted to reduce their holdings due to market uncertainties.
Consequently, the average yield expanded by 11 basis points to reach 13.93%. This increase followed the Debt Management Office’s (DMO) failure to meet its monthly borrowing target, leading to a significant drop of about 67% in investors’ demand at its primary market auction.
The prevailing inflation rate has weakened returns on fixed-interest securities in the backdrop of a tightening policy rate. Foreign portfolio investors remain disinterested in Nigerian bonds, primarily due to the negative interest yield on naira-denominated assets.
Yesterday, the bond market saw a dominance of bearish sentiment, according to CardinalStone, evident from the selling pressure, especially in the middle of the yield curve (+37 bps). Market reports highlighted the APR-2032 and JUL-2030 bonds as significant, with their yields increasing by 85 and 47 basis points to close at 14.70% and 14.26%, respectively.
However, losses were notable in the mid-term notes, particularly in the 23 JUL 2030 bond, leading to an expansion in the average secondary market yield to 13.54% (from 13.43%).
Remarkably, the 10-year borrowing cost increased to around 14.26% (from 13.79%), while the 20-year and 30-year papers remained stable at 15.19% and 15.30%, respectively. On a different note, FGN Eurobonds showed gains across all tracked maturities, pushing the average secondary market yield down to 11.22%.
In this month’s bond auction, Nigeria’s debt agency offered instruments worth N360.00 billion to investors through the re-opening of the 14.55% FGN APR 2029 bond. The stop rate for this instrument settled at 13.85%.
Similarly, the 14.70% FGN bond JUN 2033 achieved a stop rate of 15.00%, the 15.45% FGN JUN 2038 saw a stop rate of 15.20%, and the 15.70% FGN JUN 2053 bond had a stop rate of 15.85%. Demand across these four instruments was lower, with the total subscription level dropping significantly from N945.14 billion in the previous auction to N312.56 billion.
Following the auction, the DMO reported allotments of bonds worth N230.26 billion (including non-competitive allotments of N2.50 billion), resulting in a bid-to-cover ratio of 1.4x. Analysts anticipate that yields in the FGN bond secondary market will remain elevated in the medium term, driven by the expectation of an ongoing imbalance in demand and supply dynamics.
However, analysts underline that intentional efforts by the DMO to maintain moderate borrowing costs represent a downside factor, which has contributed to foreign investors maintaining their distance from the local market.
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