This Day (Lagos)

30 January 2012

Nigeria: FGN Bonds - Investors Dump Short-Term Paper

The push to inflation from the steep rise in the retail price of petrol and the on-going discussions on the draft 2012 budget oil price benchmark has forced investors to dump short-term bonds for long-term paper, THISDAY findings have revealed.

Specifically, this month's auction of FGN bonds by the Debt Management Office (DMO) was particularly challenging.

Total bids of N109 million ($680 million) were the lowest since May 2010, when market liquidity was constrained by a delay in the monthly disbursement from the federation account, while total sales of N74 billion were short of the target of N90 billion. However, yields predictably increased from the previous month.

In the same vein, the bid for the October last year was N8 billion short of the offer of N35 billion and the DMO elected to sell just N19 billion of the paper at a marginal rate (cut-off point) of 16.00 per cent.

DMO had recently said it discontinued the issuance of lower tenor papers of 3 and 5-year in the third quarter of last year and concentrated on the 10-year instrument as part of its debt restructuring measures.

The DMO in its 2010 annual report made available to THISDAY, said the outlook for the domestic bond market reflected significant opportunities for growth in the market, in terms of number and diversity of bond issuers, range of products as well as the size and diversity of investor base.

"The crash in the equities market in 2008 and the lull that characterised the market since then, have made it imperative for corporate who typically need large long term stable funds to consider bonds as an alternative to issuing equities, while investors have become more aware of the need to diversify their portfolio in order to avoid concentration risks," the DMO had said.

In contrast, the new issue of January 22 this year was comfortably oversubscribed, and the N35 billion on offer was sold.

Experts believe the January 22 offer were popular as a new issue and because they reduce a large gap in the maturity profile of FGN bonds.

"The issue is to be sold in the next two auctions and could again be well received on the basis of the 16.39 per cent coupon, "said experts at FBN Capital.

According to FBN Capital, "We are not surprised that investors favoured the longer term paper, given the push to inflation from the steep rise in the retail price of petrol and the on-going discussions over the draft 2012 budget.

"Those discussions will be protracted now that the assembly has suggested $75/b for the oil price threshold vs. the finance ministry's $70/b. Investors will have an eye towards the meeting for the Monetary Policy Committee (MPC) today. Our call is that the policy rate will be held at 12.00 per cent."

Analysts at FSDH Securities Limited had recently warned that a further increase of the Monetary Policy Rate (MPR) would result to a drop in bond prices as yields go up.

The rise in bond yield, they stated, will be felt especially on the long tenored bonds.

FSDH further stated that rates hike would lead to demand for higher discount rates on treasury bills by investors; increase in lending rates to corporate and Small and Medium Enterprises (SMEs).

Rates hike, they added, would create additional disincentive for banks to create risky assets as they can place idle funds with CBN to earn 7.25 per cent.

"It may attract hot money into the Nigerian economy with its destabilizing impact in the foreign exchange market; may lead to higher inflation, and may prolong the current woes in the equities market, " the experts said.

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