Nigerian Fixed Income Remains a Tough Sell


Tuesday, October 05, 2021 / 11:06 AM / by Coronation Research / Header Image Credit:  Ecographics 


Last week, we discussed the performance of the equities market and stated that it is time to give Nigerian stocks another look. Today, we look at the trends in the fixed income market and expand on why we think fixed income will remain not an easy sell unless under the heading 'You have nowhere else to go'.

Proshare Nigeria Pvt. Ltd.



Last week, the exchange rate at the Investors and Exporters Window (I&E Window) appreciated by 0.37% to N413.38/US$1. Elsewhere, the Central Bank of Nigeria's FX reserves rose by 1.35% WTD to US$36.60bn (29 September 2021) - the highest level since 12 February 2020 - signifying the sixth consecutive weekly accretion. In our view, the reserves partially reflect the International Monetary Fund's (IMF) Special Drawing Rights (SDR) allocation to Nigeria. In addition, the FGN also successfully raised US$4.00bn in Eurobonds last month. This will be banked with the CBN and should see the reserves rise to above US$40.00bn over the next few weeks, enough to provide the apex bank with enough ammunition to defend the Naira in the short term. Nevertheless, FX turnover on the official markers remains relatively low. Thus, there may be continued pressure on the official and parallel exchange rates if the CBN does not increase supply.


Bonds & T-bills    

Last week, sentiments in the Federal Government of Nigeria (FGN) bond market were mixed with a bullish tilt, as demand at the top of the week, following much-improved system liquidity, offset the primary auction result-induced selloffs. Consequently, the average benchmark yield for bonds fell by 3bps w/w to close at 11.20%. The yield of an FGN Naira-denominated bond with 10-years to maturity was flat at 12.02%. However, the yield on the 7-year bond fell by 5bps to 11.55%, and the yield on the 3-year bond fell by 32bps to 8.83%. We reiterate our view that a future rise in bond yields, if any, is unlikely to be sharp over the coming months due to unaggressive borrowing as the DMO manages its debt service costs.


Trading in the Treasury Bill (T-Bill) secondary market was bullish as inflows from the monthly federal disbursements to states and local governments (c.N360bn) and OMO maturities boosted system liquidity. As a result, the average benchmark yield for T-bills fell by 32bps w/w to 5.29%, with demand concentrated at the mid-segment of the curve. Elsewhere, the average yield for OMO bills declined by 11bps in the week to close at 6.32%. Specifically, the annualised yield on a 343-day T-bill fell by 81bps to 7.49%, while the yield on a 320-day OMO bill rose 12bps to 7.53%. At the T-bill primary market auction (PMA), the DMO allotted N115.01 billion (US$279.84m) worth of bills across all tenors. Accordingly, stop rates remained unchanged on the 91-day (2.50%) and the 181-day (3.50%) bills, while the rate on the 364-day bill rose by 30bps to 7.50% (8.11% annualised yield). Notably, demand at the auction was relatively weak, with a total subscription of N174.74bn - the lowest level since April 2021 - and a bid-to-offer ratio of 1.56x (vs an average of 4.30x over the last six months).

Proshare Nigeria Pvt. Ltd. 


The price of Brent crude rose by 1.52% last week to close at a US$79.28/bbl. Year-to-date, Brent is up 53.05% and has traded at an average price of US$68.05/bbl, 57.46% higher than the average of US$43.22/bbl in 2020. The price rallied - and almost hit US$80.00/bbl - amidst supply concerns around Hurricane Ida's disruptions and some Organization of the Petroleum Exporting Countries (OPEC) members inability to significantly increase production as oil demand picks up with the easing of pandemic restrictions across the globe. However, production in the Gulf returning close to levels reached before the hurricane and power crisis and housing market concerns in China put a ceiling on the oil price. Today, OPEC+ are scheduled to meet as the group faces pressure from some countries to produce more to help lower prices since demand has recovered faster than expected in certain parts of the world. Nonetheless, we reiterate our view that the price of Brent oil is likely to remain well above the US$60.00/bbl mark for several months.



The NGX All-Share Index (NGX-ASI) surged by 3.23% last week, the largest weekly gain since the week has ended 29 January 2021, to close at 40,221.17 points. Notably, the index crossed the 40,000 psychological mark to hit its highest level since 24 February 2021, almost erasing all its losses for the year (YTD: -0.12%). Dangote Cement +14.29%, Presco +9.93%, FBNH +7.33% and Nestle Nigeria +5.71% closed positive last week, while BUA Cement -2.94%, FCMB Group -2.36%, Guinness Nigeria -1.33% and Honeywell Flour Mills -1.05% closed negative. Sectoral performances were bullish as the NGX Industrial led the gainers, rising by +6.65%, followed by NGX Consumer Goods +3.35%, NGX Oil & Gas +0.92% and NGX Banking +0.60% indices. Conversely, the NGX Insurance index declined by -7.58%.


Nigerian fixed Income Remains a Tough Sell

This year, the theme for the fixed income markets has been spread widening, with the average yield of FGN bonds expanding by 508bps YTD and the average yield on Treasury Bills (T-bills) expanding 482bps YTD. Yields on the CBN's OMO bills have also followed a similar trajectory, rising by 581bps YTD. The widening was much more significant in the middle of Q2 2021. However, yields reversed from that point on.


Proshare Nigeria Pvt. Ltd.


Overall, the widening came as investors continued to demand higher yields at auctions amidst surging inflation. Other factors that influenced yields include the squeeze in system liquidity (see Coronation Research, Interest rates and banks' margins), reducing participation from institutional investors (who preferred higher-yielding fixed deposits), and the federal government's significant deficit financing needs this year.


Proshare Nigeria Pvt. Ltd.


Where do we go from here? On the demand side, N1.59trn [T-bills (N610.30bn), OMO bills(N750.90bn) and FGN coupon payments (N224.91bn)] worth of instruments will mature and contribute to system liquidity in Q4-21. Additionally, as monthly contributions grow, demand from Pension Fund Administrators (PFA) is likely to remain strong. PFAs have approx. N13trn in assets under management with about N7.65trn (64% of AUM) invested in government securities.


Proshare Nigeria Pvt. Ltd.


On the supply side, we highlight that the federal government planned to raise a total of N2.34trn in domestic debt to fund its budget deficit for 2021. As of end-Q3 2021, the government has raised 102% of its target for the year and is not likely to be under significant pressure to increase its local debt stock over the rest of the year.


In our view, yields seem to have hit the ceiling or resistance at current levels. If any, a future rise in yields is unlikely to be sharp over the rest of the year. With the monetary authorities still mainly concerned with driving growth, it seems clear that they have finished with the effective tightening of market interest rates that characterised the first half of the year. Thus, for the time being, they seem content to see 1-year yields substantially below 10.0% and average bond yields below 12%.

Proshare Nigeria Pvt. Ltd.

Related to Coronation  

1.       Nigerian Stocks: Worth a Second Look

2.      Taking Stock of the LDR Policy

3.      Nigerian Banks: H1 2021 Scorecard

4.      Interest Rates and Banks' Margins

5.      Why Equities Have Been So Bad

6.      Dividend Yields and Investment Returns

7.      The Role of Dividends in Total Return

8.     Why You Need to Study Total Equity Returns

9.      FX Policy Deja Vu

10.  MPC Likely to Hold Rates

11.   Inflation on the Downtrend -OpEd by Coronation Research

12.  Nigeria's Oil Conundrum

13.  CBN Funding the Government

14.  The World Bank Blueprint

15.  Bitcoin and Nigeria

16.  Oil Prices and Foreign Exchange (FX) Reserves

17.   The CBN's Box of Tools

18.  Slow GDP Points to MPR Rate Hold

19.  Comparing Mutual Funds, Apples and Oranges

20. Transparency and Foreign Direct Investment

21.  The Strange Yield Curve

22. Naira Bonds Sell-Off, US Bonds Rise

23. Oil Prices to the Rescue?

24. The CBN and Interest Rates

25. Monetary Policy Rate Decision

26. Inflation and Interest Rates

27.  The US 10-Year Bond and Nigeria

28. T-Bill Rates Heading Towards 10.0%

29. Q4 2020 GDP and the Implications for Markets

30. Eurobonds and Foreign Financing

31.  Why Inflation is Important

32. Nigerian GDP Better Than Thought

33. Naira Crawling Peg?

34. A Year in Two Charts

35. Interest Rates on the Rise

36. Oil Above US$50.00 per Barrel

37.  Saving Interest Rate?

38. Where is the Money Going?

39. CBN Likely to Leave MPR at 11.50%

40. Second-best Equity Market in the World

41.  The Biden Effect

42. US Dollar Eurobond Yields Now Higher Than Naira Yields? 

43. Fiscal and Monetary Response to Events 

44. Winners and Losers in Africa  

45. The Return of the Equity Market  

46. Which Way for Interest Rates?  

47.  Coronation Research Releases Report Themed: From Savings to Mutual Funds  

48. A Case of Eurobond Market Contagion  

49. In the Hands of OPECplus  

50. The Policy Mix and The Markets  

51.  The Oil Price and Production Paradox  

52. Cracks In The Bond Market?  

53. No Big Change in FX Policy  

54. Coronation Research Releases Outlook for Insurance Sector - From Lagoon To The Blue Ocean  

55.  Micro-Insurance, Tech, Key to Deepening Nigeria's Insurance Sector - Coronation Research  

56. Navigating the Capital Market: The Investors' Dilemma  

57.  Market Interest Rates Back Up - Coronation Research  

Proshare Nigeria Pvt. Ltd. 

Related News

1.       Access Bank Dangles Fresh US$500m Eurobond Issue, Oversubscribed by 200%

2.      NT-Bills Update: Average Yield Contracts 30bps WoW to 5.29% Following Improved Demand

3.      October 2021 FGN Savings Bonds Offer for Subscription

4.      Ahead of Next T-Bills Auction Scheduled for 29th September 2021

5.      Fixed Income Quarterly Q3 and Q4 2021: The Fiscal to the Fore

6.      Bearish Performance as Average Yield Marginally Advance 4bps WoW to 5.61%

7.      Access Bank Plc Announces Additional Tier 1 Eurobond Issue

8.     September 2021 Bond Auction: A Good Auction Outcome for the DMO

9.      Summary of FGN Bond Auction Results for September 2021

10.  MTN Nigeria to Launch N90m Series 2 Bonds; Awaits Regulatory Approval

Related News