Amid Plunge in Nigeria’s Eurobond Prices, Yield Hits 13.76% High  

Kayode Tokede

Data by the Debt Management Office (DMO) has revealed that yield on the 13 tracked Nigeria Eurobond prices has continued to dwindle as yield continued to skyrocket, hovering around 8.33 per cent and 13.76 per cent.

A Eurobond is a bond issued offshore by governments denominated in a currency other than that of the issuer’s country. Eurobonds are usually long-term debt instruments and are typically denominated in US Dollars (USD).

The yield on bonds has risen lately, driven by the increase in interest rates by the United States Federal Reserves. The US Fed commenced rate hikes in response to record-high inflation rate experienced in the world’s largest economy.

Inflation rate in the US has increased from 7.5 per cent in January to 9.1 per cent as of June 2022.

The Central Bank of Nigeria (CBN) this year has increased MPR from 11 per cent to 14 per cent, in a move to curb rising inflation rate.

As gathered by THISDAY from the latest data by DMO as at July 21, 2022, the highest bond yield was the 8.747% $1.0 billion JAN 2031 Eurobond (matures in about nine years), trading at a yield of about 13.76 per cent.

The same bond was trading at a yield of 7.86 per cent as of December 31, 2021.

The 2031 Eurobond price opened trading in 2022 at $105.087 and has dropped to $74.785, representing a decline of $30.30 or 28.8 per cent.

Also, Nigeria’s Eurobond Yield with a maturity of 2023, and lowest yield as of July 21, 2022 at 8.328 per cent had opened trading at 1.481 per cent.  

The Eurobond has a total face value of $500 million and was priced at about $103.473 when it was initially issued and closed July 21, 2022 at a price of $97.607.

According to data from the DMO, the 6.375% $500m JUL 2023 Eurobond yield has increased to 8.328 per cent from 3.672 per cent as of December 31, 2021.

According to analysts, the hike in interest rates tends to affect emerging markets as such Nigeria is one of them, stressing that it is expected to impact on the cost of borrowing.

They noted that a rise in yield occurs when investors sell Nigerian Eurobonds forcing prices to drop and bond yields are inversely proportional to bond prices.

Speaking with THISDAY, the vice president, Highcap Securities, Mr. David Adnori, said, “The drop in prices and hike in yield on Nigeria’s Eurobond is following a trend at the global economy and action monetary authorities have taken in advanced countries to tackle inflation rate due to Russia-Ukraine war. Eurobond is issued in the international market and subscribed by foreign investors in US Dollars.  

“The interest rate hike by the US Fed means debt assets in US have increased and consequently, the yield on all debt instruments including Eurobond, among others denominated in Dollar will also increase. That is why the price of Eurobond is falling all over the world and the yield is rising. We have also seen the scenarios playing out in local interest rate recently increased by CBN to 14 per cent. The prices of bonds are failing with the yields are rising.”  

A debt analyst who pleaded anonymously attributed the hike in yield and decline in prices of Nigeria’s Eurobond to factors of demand and supply.

According to him, “A lot of central banks around the world are increasing their rates. The US Fed has increased the interest rate this year and when the lending rate in US increases, you will have to compensate investors in your local market.

“The Eurobonds are bought by international investors and these investors have options where to put their money. When the interest rate in their local market starts to move up, they prefer to keep money in emerging markets.

“If the demand for emerging market starts to reduce because interest rates at their local market are increasing, then, the price will starts to drop and overall yield will starts to increase. Interest rates are increasing in international markets.

“Even in Nigeria, the CBN has increased interest rate twice.  The hike in yield is meant to drive demand and supply in the Eurobond market. If the demand is slow, the price will drop and if the price comes down, yield goes up.”

Analysts at Cordros Securities in a report titled, “heightened uncertainties amid great policy unwind: domestic economy H2 2022 Macroeconomic Outlook”, said, “Like in previous years, we believe the FGN’s ability to mobilize debt is crucial to achieving a meaningful budget implementation rate. On foreign borrowing, we highlight that the FGN already borrowed $1.25 billion or (N518.75 billion) through Eurobond issuance in March.

“The amount borrowed leaves a gap of N2.05 trillion in relation to the budgeted foreign borrowings (N2.74 trillion). In May, the finance minister stated that Nigeria is unlikely to patronise the Eurobond market again this year, given that external financing condition is no longer favourable given increases in global interest rates.

“Accordingly, we expect the gap to be channelled to the domestic debt market. Elsewhere, we are conservative with other financing sources as we assume that the government will meet its target from privatisation proceeds (N90.73 billion) and multilateral/bilateral project-tied loans (N1.16 trillion).

The firm noted that, “Given the substantial amounts of borrowings made by the FG in 6M 2022, we imagine that growth in expenditure must be running ahead of the increase in revenue, leading to a widening fiscal deficit.”

The Finance Minister, Mrs Zainab Ahmed in July 4 had said the government had abandoned plans to raise about $950 million selling overseas bonds, owing to unfavorable market conditions during the time frame approved for the fund raising.

She had said in April that the government planned to sell as early as May its second external debt this year to help plug fiscal deficits.

The planned $950 million bond sale would account for the balance of $6.1 billion overseas borrowing planned for 2021, after it raised the second tranche of $1.25 billion in March.

“We were not able to do that because the market pricing was not good and also the approval period for us has closed,” Ahmed said in an interview on the sidelines of Islamic Development Bank meetings in Egypt. “The approval period was up to May 31, 2022, so we are not going to be able to take that one any more.”

Africa’s biggest crude producer was one of the first sovereigns to tap the Eurobond market after the start in late February of Russia’s war on Ukraine, which stoked commodity prices and inflation just as the US Federal Reserve raised interest rates.

The nation plans to curb borrowing costs this year by using the International Monetary Fund’s (IMF) general allocation of reserves known as special drawing rights to fund projects, then reducing external borrowings, the minister explained.