The Federal Government has released the yields (rate of borrowing) for its latest bond offering. Recall, we had published an article revealing that the Government was set to borrow about N120 billion in fresh loans.
Nigerian Government borrows by selling bonds to investors inviting them to bid for interest rates that they wish to earn on the bonds. The government selects which investor to sell to based on the average of the lowest yields bided at an auction.
According to a Reuters report, Nigeria is borrowing the following amounts via sale of bonds at these yields
- N55 billion @14.98% for tenor ending 2036
- N35 billion @14.5% for a tenor ending 2012
- N30 billion @14.5%
The impact of this yield could likely be known when the Central Bank convenes for its much-anticipated monetary policy meeting later this month. However, with inflation expected to rise above 16% (according to Nairametrics) we believe it is likely that the CBN will raise its Monetary Policy rates above the current rate of 12%.
A hike in the MPR typically signifies a rise in lending rates for commercial banks. Lending rates for most consumer loans have topped 24% in recent months and looks likely to rise even further with the government crowding out individuals and even businesses from the debt market. Commercial Banks who have seen their capital adequacy ratios come under pressure due to their spate of poor risk assets, are now more favorably disposed towards buying risk free government debts at attracting yields, than lending to businesses in a faltering economy.
The government still plans to borrow money having earmarked about N800 billion in loans from the bond market. At this rate we believe yields could top 17% by the end of the year drastically increasing how much the government borrows and subsequently affecting how much Nigerians pay to banks as interests.
There’s a likelihood of yields getting to 20% as regards market volatility and. Negative fundamentals. The question is, will the FPI’s still see the fixed income market attractive with yields that high? Because it get unattractive to a point as they may see a continuous appreciation which will dissuade them of coming as they don’t know if and when a reverse will be the case to exit as speculators which they are. Secondly, how far can the Fg go with giving out high coupons? With dwindling revenue, just how far
So even after devaluation, the FPI are still saying they don’t trust govt. why didn’t the govt sell dollars to those who needed them under the former exchange regime and forget about the devaluation story.