11 September 2017

Nigeria: Analysts Bearish On Bond Market, Explain Low Patronage

Analysts at Cordros Capital Limited, an investment banking firm, have said the bond market will continue to witness low patronage in the month of September as investors focus on bargain hunting in equities market, taking advantage of attractive yields in the treasury bills market.

Reviewing the performance of the financial markets in the month of August and making projections for September, Cordros Capital said that demand for the Federal Government of Nigeria (FGN) bonds was low leading to under subscription in August. According to them, the Debt Management Office (DMO), on behalf of the FGN, allotted bonds valued at N56.05 billion (vs. N135 billion offered), comprising N9.18 billion (vs. N35 billion offered), N17.51 billion (vs. N50 billion offered), and N29.36 billion (vs. 50 billion offered) of the JUL-2021, MAR-2027, and APR- 2037 bonds, respectively - all in reopening.

They explained that the five-year, 10-year, and 20-year bonds, although undersubscribed, were issued at significantly higher-than-previous stop rates of 16.80 per cent (previously 16.24 per cent), 16.80 per cent (previously 16.25 per cent) and 16.90 per cent (previously 16.25 per cent) respectively, the highest since January.

"We attribute the notable under subscription to the low level system liquidity, and more specifically, the near-coincidence of the auction with Lagos State's N27 billion bond auction - offered at a higher rate of 17.5 per cent with an issue rating of A+ by Augusto & Co," they said.

The analysts therefore stressed that with inflation rate expected to remain sticky downward for the month of August, "we do not see the expected improvement in system liquidity translating into significant demand in the bond market, as return-hungry investors will hunt bargain in the equities space while taking advantage of attractive yields in the treasury bills market."

Analysing the performance of the equities market in August, the analysts said the market closed lower for the first time in six months, as investors took profit across most sectors, particularly the Oil and Gas, wherein stocks recorded the largest contraction.

According to them, the NSE All-Share Index (ASI) declined by 0.96 per cent to 35,504.62.

"The loss was not unexpected (the ASI has consistently recorded negative returns in August over the last five years), as the significant gains recorded for five consecutive months provided a leg room for profit taking. Also, it reflected the absence of any fundamental news in the market as most companies (save for some banks) on the bourse had released Q2/H1 results in July in line with the regulatory post-listing requirement," they said.

Looking ahead, the analysts said while noting the risk of continued profit taking, "the expectation of continued impressive earnings in Q3 (for the banks, consumer goods, cement, and agric companies especially) and importantly, improved developments in the macro environment, should drive recovery on the local bourse."


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