FG’s plan to borrow N1.2trn excites market as yield leaps

Plan by the Federal Government (FG) to borrow N1.2 trillion through the Debt Management Office (DMO) has quickened yields of bonds. In the secondary market, the average yield on Federal Government of Nigeria (FGN) bonds spiked by 64 basis points as investors sold off their holdings in a bid to reshuffle their respective portfolios for an improved return.

Thus, prices of FGN bonds traded decreased for all maturities. Trading data show there were selloffs across the short, mid, and long ends of the curve. Analysts are expecting higher yields to resurface due to large borrowings that will pass through the debt market.

The bearish tone recorded last week occurred on the back of the Debt Management Office (DMO) plan to raise N1.2 trillion from the debt capital market in the first quarter of 2023 to finance the widening budget deficit.

A number of fixed income analysts said the expected issuance is a catalyst for yield repricing amidst double-digits headline inflation rate and worsening exchange rates which have watered down Nigeria’s funds/asset managers’ portfolios returns significantly.

In its auction calendar, DMO announced a plan to begin FGN bond sales at the end of January, thus the average yield across instruments expanded by 64 basis points to 13.4 per cent on Friday.

“We attribute this week’s bearish sentiment to investors re-pricing bonds upwards in reaction to the release of the first quarter-23 FGN bond issuance calendar, which showed higher volume on offer”, analysts at Cordros Capital said in a market brief.

DMO will raise a total sum of N1.20 trillion in the first quarter of the year, a rather strong increase of 150 per cent when compared with N480 billion raised in the first quarter of 2022.

Across the benchmark curve, traders said the short (+53 basis points bps)), mid (+49bps), and long (+86bps) term instruments recorded expansions in yields. Specifically, the MAR-2027 (+166bps), APR-2032 (+67bps), and MAR-2036 (+121bps) bonds recorded the largest yield increases.

“In the medium term, we expect frontloading of significant borrowings for the year by the FG to result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply”, Cordros Capital stated.

According to MarketForce, in the Eurobond secondary market, activities were mostly bearish as sell-side pressures were mostly seen across the curve amidst the recovery in Asian equities and the hawkish stance taken by Fed chair Bullard.

Due to selloffs, the overall average yield for the FGN sovereign curve climbed 15 basis points to settle at 10.05 per cent, according to analysts at Cowry Asset Management Limited. Across tenors, traders noticed sell pressure at the medium and long end of the curve as the average yield rose while the average yield at the short end of the curve was largely unchanged.

Specifically, the price of 10-year, 16.29 per cent FGN MAR 2027 paper fell by N5.59, 15-year 12.50 per cent  FGN MAR 2035 bond lost N5.79, 20- year 16.25 per cent FGN MAR 2037 debt decreased by N2.23 and 30-year 12.98 per cent FGN MAR 2050 instrument declined by N2.80

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