Monthly Fixed Income Review For February 2019


Sunday, March 10, 2019  07:00 AM / Zedcrest Capital

Market Review

Bond Yields Decline by C.100bps In Post-Election Rally

The FGN Bond market maintained a bullish run in the month of February with increased demand from foreign portfolio investors pressuring bond yields c.100bps lower to c.14.20% on average from c.15.21% closing the previous month.  The renewed interests from Foreign Portfolio Investors came mostly on the backdrop of a relatively peaceful conclusion to the presidential elections which were held on the 23rd of February. Investors’ interests were mostly on the 10-year benchmark (2028s) which witnessed significant increase in traded volumes, with its yields compressing by c.130bps M/M to 13.95% as at 28-Feb.


The DMO conducted its monthly bond auction on the 20th of February, (3days prior to the presidential elections), with a total amount of N150bn offered equally on the 2023, 2025 and 2028 maturities. The Auction by the DMO was oversubscribed by c.156%, with demand heavily skewed to the 2028s, which made up c.84% of the total subscriptions of c.N234bn. The DMO consequently sold the total offered amount of N150bn with stop rates clearing at c.52bps below their previous levels at 14.52%, 14.80% and 14.94% on the 2023s, 2025s and 2028s respectively.

Increased Offshore Demand Drive C.170bps Decline In Ntb Yields

Renewed Interests from Foreign Portfolio Investors also fuelled a considerable decline in NTB yields, with increased demand witnessed mostly on the longer tenured bills. Both local and foreign market players increased their demand for the long tenured bills over the course of the month, largely driven by expectations for an OMO rate cut or a possible suspension of the long tenor OMO offering by the CBN, given the relatively scanty OMO maturities between March and August 2019. Average NTB yields consequently declined by c.170bps from 14.41% at the start of the month to 12.71% as at 28-Feb.

The CBN sustained its spate of OMO issuances over the course of the month, with a total sale of N2.19Trn of the N1.87Trn maturities. There were however no stabilization securities issued during the month due to significantly aggressive levels of demand witnessed especially in the later part of the month, which saw the one year OMO rate cut by 70bps to 14.30% at the last issuance for the month. The short and mid tenor stop rates however remained unchanged at 11.90% and 13.50%.

The CBN also rolled over the total amount of N268.50bn maturing NIGTBs on behalf of the FG at two separate auctions held on the 13th and 28th of the month. The Auctions remained significantly oversubscribed on the 364-day bill, with stop rates dropping by c.63bps from 15.00% at 31-Jan to 14.37% at the 27-Feb auction. Average stop rates across tenors were however c.8bps lower due to softer moderation on the 91 and 182 day bills.

Investors Sustain Interest In Nigerian Eurobonds As Election Risks Clear

The Nigerian Sovereign Eurobonds remained largely bullish in the month of February but with demand less aggressive than the rate witnessed in the previous month where market players reacted to the Dovish turn by the US FED and Improvements In Trade talks between the US and China.
The aforementioned conditions remained in the month of February, with market players digesting Minutes of the US Fed meeting which affirmed the Fed’s dovish stance, just as the US also postponed the deadline for its trade sanctions earlier scheduled for March 1, following increased negotiations with their Chinese counterparts.  Market players were also positively disposed to the Nigerian Eurobonds as political risks cleared following a relatively peaceful conclusion to the much anticipated General elections. Yields were consequently lower by c.35bps, with an average of c.6.87% as at 28-Feb, having already declined by c.110bps to c.7.22% in the month of January.

In the Nigerian Corporate Eurobonds Space, Investors remained mildly bullish, with sustained demand witnessed on the FIDBAN 22s (-23bps) and ZENITH 22s (-15bps). Investors however turned bearish on the ACCESS 2021 senior bond which rose by c.36bps M/M, even as demand interests waned on the DIAMBK 19s as it edges closer to its maturity date (21-May-19).


Market Outlook

Bond Yields to Maintain C.14% Support as Offshore Interests Wane

Whilst Nigerian Local currency Bond yields remain one of the most attractive amongst its emerging market peers, we do not expect yields to decline significantly below current levels as the significant offshore interests which drove yields c.100bps lower in the previous month following conclusions to the general elections have begun to cool off, whilst local investors remain sceptical of significantly over weighting bonds at current levels given expectations for increased borrowings by the FG to finance its budgetary expenditures in H2 2019. We however expect the market to remain slightly bullish over the course of the month, with bond coupon payments totalling c.N163bn expected to support demand interests in the near term.

T-Bill Yields To Remain Depressed Due To Lower (Q2-Q3) Maturity Profile

Nigerian Treasury Bill yields which compressed significantly on the back of significant offshore and local market interests in the previous month is expected to maintain a downtrend given the recent cut in OMO stop rates and the removal of the long tenor maturities from the regular OMO auctions conducted by the CBN. The aforementioned is expected to persist given the significantly smaller amount of OMO (N1.9trn) and NTB (N1.2trn) maturities between March and August of 2019. The CBN is however expected to sustain its recent spate of OMO issuances on the short and mid tenor maturities, howbeit, with stop rates expected to decline slightly lower, as market players continue to prefer short duration exposure over longer tenured bonds in the medium term. 

Eurobond Interests To Wane As Positive Tailwinds Ease

Whilst the Nigerian Eurobonds remain a good buy for us based on fundamental and relative valuations, with further room for price appreciation y/y in our opinion, we expect a slowdown in demand from the significant buying interests which have driven yields c.145bps lower YTD. This is as positive tailwinds including the strong rebound in oil prices, receding threat of trade wars and slowdown in monetary tightening by global central banks witnessed earlier in the year become confronted by weaker global growth prospects especially within the Euro area and China, consequently leading investors to re-appraise allocations to riskier asset classes across the Emerging Market space.

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