Nigeria’s Eurobond yields spiked to as high at 12% last week as investors fled emerging market securities in the wake of Covid-19 pandemic and the crash in oil prices.
Higher bond yields: Nigeria’s 2049 Eurobond Yields traded at a yield of 12.81% as prices fell to $72.94. The coupon rate for this loan about 9.2%. The shorter ended 2021, 28th January bond yields sold for $97.29 with a yield of 10.09%. Bond yields are inversely correlated to their underlying prices. The lower the price of a bond the higher the yields. A falling bond price is often associated with higher risk consideration.
Country Risk: As Oil prices continue to fall, foreign portfolio investors are worried about the government’s ability to meet its credit obligations without seeking refinancing of the bonds. Nigeria currently has over $29 billion in external loans with the Eurobond component stated at $10.8 billion as of September 2019. The country’s revenue situation could affect its ability to repay its bond obligation forcing a sell-off and increasing bond yields.
Downgrades: Earlier in the month, one of the global rating firms, Fitch downgraded Nigeria’s credit ratings. This rating agency explained the downgrade was mostly due to the decrease in the country’s external reserve from $45.1 billion as of June 30, 2019, to about $38 billion as of January 31, 2020. The decline in the external reserve has persisted as it now $36.18 billion. It is also expected to fall further with the crash in oil prices below $30 per barrel.
In December 2019, Fitch Ratings revised the outlook on Nigeria’s long term foreign-currency issuer default rating (IDR) to ‘Negative’ from ‘Stable’, but affirmed the country’s sovereign credit rating at B+. However, Fitch’s Middle East and Africa sovereign analyst, Jan Friederich, hinted that the B+ rating could be revised downwards to negative.
Eurobond Yields vs FGN Bonds Vs Corporate Bonds: Analysts also noted that Nigeria’s Eurobonds now traded at almost the same yields as FGN Bonds while some Corporate Bonds yields even had lower yields than Eurobonds.
This is somewhat of an anomaly as investors often price local bond securities at a higher yield when compared to foreign currency denominated bonds. This perhaps shows just how spooked foreign portfolio investors are about Nigeria’s revenue situation.
Buying Opportunity? The latest devaluation of the naira may have also presented a buying opportunity for Nigerian Eurobonds. With yields as high as 12%, investors will be in line for significant upside if prices rally later in the year. While the risks still remain high, a bond rally could ensue once the Covid-19 virus is contained and oil prices stabilize. This is not taking into consideration another possible round of devaluation later in the year.
Interest rates will remain low until the end of H1 2021 – Meristem Securities
Meristem Securities has argued that interest rates will remain low until, at least, the end of H1 2021.
Meristem Securities has asserted that interest rates will remain low until, at least, the end of H1 2021.
This statement was made at the recently held webinar on Global Economy and Outlook, which the company themed: Bracing for a Different Future.
Although the company acknowledged that there is mounting pressure for upward movement in yields from several stakeholders, it appears the company concurs nothing concrete is in sight.
This line of reasoning seems to have influenced their decision to advise investors to move away from Treasury instruments.
What they are saying
Meristem advises that:
- “Buy and hold strategy investors seeking to generate above average returns should move away from risk free Treasury instruments and focus on investment grade commercial papers and bonds which satisfy investment objectives.”
- “Active traders with higher risk appetite are advised to focus on high-yield short duration instruments, which would be re-invested into a higher yield environment should rate reversals occur.”
The advice regarding shunning Treasury instruments appears to be in order, considering that treasury bill rate has been declining, with the latest figure — November 2020 — 0.03% as per the CBN monthly interest rate data.
Further checks from the Debt Management Office website, indicates that the latest figures for Eurobonds and Diaspora bond fall short of the fixed yield at issue for all the different categories of bonds in issue.
What you should know
Latest figures from the CBN’s monthly interest rate indicate that:
- Treasury bill rate has been on a steady decline for six months, down to 0.03% since the last rise (2.47%) in May 2020.
- Fixed deposit rates (one, three, six and twelve months) have also been declining – the latest figures for these indicate that in November 2020, one-month deposit rate was 1.92%, 2.9% for three months, 2.84% for six months, and 4.89% for 12 months.
- Compared with the corresponding period in 2019, the figures indicate that these rates fell by 75%, 66%, 71% and 49% respectively.
DMO offers N150 billion worth of FGN Bond for subscription in January 2021
The DMO has offered for subscription, FGN Bonds valued at N150 billion for January 2021.
The Debt Management Office (DMO) has announced the offer for subscription, Federal Government Bonds (FGN Bonds), valued at N150 billion for January 2021.
This is according to a notification released by the DMO and seen by Nairametrics. The latest offers come in three tranches:
- N50, 000,000,000 – 16.2884% FGN MARCH 2027 (10-Year Re-opening).
- N50, 000,000,000 – 12.50% FGN MARCH 2035 (15-Year Re-opening).
- N50, 000,000,000 – 9.80% FGN JULY 2045 (25-Year Re-opening).
Other key highlights of the recent offer
- Units of Sale: N1, 000 per unit subject to a minimum subscription of N50,001,000 and in multiples of N1,000 thereafter.
- Auction Date: January 20, 2021.
- Settlement Date: January 22, 2021.
- Interest Payment: Payable semi-annually.
What you should know
- Checks by Nairametrics revealed that the latest FGN Bond offer across three maturities is N90billion more than amount offered in the previous month (December 2020) at N60billion, indicating an increase of 150%.
- Interested investors were advised to contact offices of any of the listed 13 Primary Dealer Market Makers (PDMMs).
- The DMO reserves the right to alter the amount allotted in response to market conditions.
- FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria (FGN), issued by the Debt Management Office (DMO) for and on behalf of the Federal Government. The FGN has an obligation to pay the bondholder the principal and agreed interest as and when due.
Nigeria’s pension funds continue to divest from treasury bills
Since the beginning of 2020, pension fund managers have moved out about N1.112 trillion of treasury bills investments into mostly FGN Bonds.
As the low-interest regime that characterized most of 2020 continues with no immediate sign of an increase, pension fund managers have also continued to rid their portfolios of treasury bill investments.
Analysis of the recently released September 2020 edition of Pension Fund assets, by the Pension Commission of Nigeria, PenCom, shows that pension fund managers reallocated their assets away from treasury bills to FGN Bonds.
In the month of September 2020, according to the latest report, pension fund managers closed out of treasury bill positions worth N0.224 trillion while loading up on FGN bonds worth N0.254 trillion. Since the beginning of 2020, pension fund managers have moved out about N1.112 trillion of treasury bills investments into mostly FGN Bonds.
At the beginning of 2020, total pension fund assets invested in treasury bills stood at N1.88 trillion, but that has fallen to N0.78 trillion as at the end of September 2020. Put in another way, as at the end of 2019, 18.4% of pension fund assets were invested in treasury bills but as at September 30, 2020, pension funds’ treasury bill investment stood at 6.7%
Implications for domestic borrowing and monetary policy
Treasury bills serve a whole lot of purposes for the government. They are used as a means for the government to borrow to cover short term budgetary deficits as well as a means for the Central Bank to manage the supply of money and its inflationary effects.
With the increasing and seeming lack of interest by pension fund managers, who, usually are big players in the treasury bill market, the government may find it a bit problematic raising the much-needed domestic borrowing from them.
In like vein, the Central Bank’s ability to implement monetary policies through treasury bills and others, open market operation, may also suffer. May be, fiscal policy may become a more potent instrument of economic management, if that happens.