Analysis During the review week, secondary market activities for FGN bonds were influenced by the FGN bonds monthly auction and the announcement of JP Morgan’s intention to include Nigerian FGN bonds in its emerging markets government bond index.
During the monthly FGN bonds auction, N25.00 billion worth of each of the three (3) bonds on offer were sold i.e. the 15.10 April 27, 2017; 16.00 June 29, 2019 and 16.39 January 27, 2022, at marginal rates of 16.33%, 16.14% and 15.90% respectively against 16.20%, 16.59% and 16.30% respectively during the previous auction. All the securities were reopened. In addition, subscription levels for the instruments stood at 176.00%, 283.88% and 536.12% respectively, while total subscriptions stood at N249.11billion against N121.60 billion at the July auction.
We note the relatively high subscription level on the16.39 January 27, 2022, which could be attributed to investors’ search for yields hence taking advantage of the high coupon of the bond. The range of bids for the auction was 14.98%-18.25% against 15.00%-18.00% during the last one. However, we observed that the subscription level recorded by the 16.39 January 27, 2022 resulted in its low marginal rate when compared to other reopened bonds, considering its term to maturity (TTM) of 9.45years.
Nigeria’s FGN bonds are likely to be included in JP Morgan’s emerging markets government bond index from the fourth quarter of 2012. Potentially, this is expected to bring c.US$1 billion into the Nigerian bond market. We understand that Nigeria meets the minimum requirements to qualifying for the index which includes, but not limited to, being classified as a low/upper-middle income country by the World Bank for at least two successive years, the availability of two-way daily pricing on the bonds and a sufficiently liquid bond market among others. We also believe that the Central Bank’s lifting of restrictions on foreign investors’ participation in the bond market in July 2011 could have helped to facilitate the inclusion in the government bonds in the index.
Meanwhile, the over-the-counter (OTC) market witnessed intraday volatility as reflected by the choppy movements in yields in reaction to the liquidity status of the market and the announcement by JP Morgan. We equally note the high volatility at the shorter end of the curve and the 7year & 10year bonds. (fig. 2) In our opinion, this may not be unconnected with the current high interbank rates (c.22% - see Nigeria Bond Watch_13Aug12) whose effect is been felt on the shorter ended curve and the JP Morgan’s decision to include the 10year benchmark bond and others (2014 and 2017 maturities) to their government bond index. However, we expect traders to continue taking position in respect to this in the days ahead.
In the week ahead, we expect a treasury bills auction worth c.N70.65 billion while there will be a treasury bills and OMO bills maturity worth c.N50.65billion and N116.15 billion respectively. In our opinion, considering the injection of funds from the monthly budgetary allocation (FAAC) and excess crude account, the market is expected to be liquid and active as traders will try to cover their positions. However it is not unlikely that the apex bank (CBN) will continue with its liquidity tightening measures via its OMO activities.
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