FGN Bonds Attract  High Patronage as Investors Return to Market

Eromosele Abiodun
After the initial apathy that trailed the Nigerian bond market following the decision by JP Morgan to remove Nigeria from its Emerging Market Government Bond Index (GBI-EM) last year, the market has since the beginning of the year witnessed improved  patronage as investors  return  to the market.

On September 8th 2015, the United States-based lender, JP Morgan, said Nigeria would be phased out of its GBI-EM by the end of October last year due to alleged lack of liquidity and transparency in the nation’s foreign exchange market.

The announcement came after JP Morgan earlier in January, 2015, placed Nigeria on a negative index watch on its Government Bond Market Index.

The Debt Management Office (DMO) in its monthly auction of FGN bonds last week comfortably raised its sales target of N100 billion ($510 million) from the reopening of three debt issues.
However, the total bid of N207 billion fell short of the previous month’s N262 billion yet provided more than adequate cover for sales.

Analysis of the activity showed that the marginal rate (effective cut-off point) was about 60bps higher than in March for the same three bonds, and rose above 13.00 per cent for the benchmark long bond (Mar ’36).
Analysts believe that the dire inflation numbers for last month may have pushed up the range of bids.
Also, the DMO raised a further N70 billion from the sale of Jan ‘26s on a non-competitive basis to an unnamed public body.

Commenting on the development, analysts at FBN Quest insist the DMO is not selling from a position of strength.
“Net domestic debt issuance is set this year at about N950 billion and holders of the Aug ‘16s have to be paid a further N560 billion on maturity. The DMO’s provisional issuance calendar for Q2 2016 has sales of up to N120 billion in both May and June. Together with rising inflation, this would normally point to a widening of yields.

“We note reports this week from Nigerian sources of $6 billion infrastructure financing from China. The same sources also suggested that the funds would be available on the identification of suitable projects. As ever, we are waiting for more detail. The important point is that, the more the authorities can raise quickly from China and other external concessional sources, the less high-cost domestic debt they have to issue, “they said.

Nigeria was included in the JP Morgan Emerging Market Government Bond Index in 2012, based on the existence of an active domestic market for FGN bonds. The GBI-EM indices consist of regularly traded liquid fixed-rate domestic currency government bonds. Nigeria was expected to have a 0.59 per cent weight of the $170 billion of assets under management of the index. At the time, Nigerian bonds were offering yields of up to 16 per cent compared to the GBI-EM Index yield of 5.8 per cent

Analysts had warned that if Nigeria is removed from the JP Morgan Index many foreign investors will be forced to sell off their Nigerian bond holdings, which is estimated to be worth about $2 billion.

“There are foreign portfolio investors who knew little about investing in Nigeria but decided to invest because it is listed on the JP Morgan’s GBI-EM index. Delisting Nigeria would also mean that bond yields and borrowing costs will increase, negatively affecting Nigeria’s dire economy. The Naira may also face another round of major devaluation, as the economy could struggle to sustain the pace of forex outflows outside Nigeria,” said Gregory Kronsten Associate Director Head, Macroeconomic & Fixed Income Research FBN Capital.