January has seen investors across the world take fright, with equity markets as diverse as the US Nasdaq and those of Russia, Korea and Denmark all correcting. So much for the fear factor. We know that successful investors are not easily scared and that they buy value patiently over time. It appears this has been happening with FGN US dollar Eurobonds recently.
FX
Last week, the exchange rate at the Investors and Exporters Window (I&E Window) weakened by 0.08% to close at N416.33/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria declined by 0.41% to US$40.15bn, as the CBN continues to intervene in the FX markets. Our view remains that the CBN’s position is strong as the level of FX reserves remains high in the long-term context. Hence, it seems likely that stability will be maintained in the I&E and NAFEX rates in the near term.
Bonds & T-bills
Last week, trading in the Federal Government of Nigeria (FGN) bond secondary market was bullish amidst buoyant liquidity from the January 2022 bond maturity, coupon payments, and Federation Accounts Allocation Committee (FAAC) inflows. Consequently, the average benchmark yield for bonds fell by 29bps to 11.64%. Accordingly, the yields on the 3-year (- 25bps to 8.78%), 7-year (-50bps to 11.88%) and the 10-year (-53bps to 12.09%) bonds tightened. Nevertheless, as liquidity thins out, we reiterate our expectation for a rise in bond yields over the medium term owing to an expected increase in domestic borrowing by the FGN to finance the budget deficit and tight domestic monetary policy amidst global monetary policy normalisation this year.
Activity in the Treasury Bill (T-Bill) secondary market was similarly bullish, as the average benchmark yield for T-bills fell by 6bps to 4.35%. The yield on the 300-day T-bill fell by 11bps to close at 5.11%. At the T-bills primary auction, the DMO allotted N223.75bn (US$537.87m) worth of bills across all tenors. The stop rates on the 91-day (-2bps to 2.48%), 182-day (-14bps to 3.30%) bills tightened. Notably, the rate on the 364-day bill reversed the trend of the last auction, falling by 10bps to 5.40% (annualised yield: 5.71%). Demand was strong, as a total subscription of N475.63bn was recorded – the highest since 11 November 2021 – implying a bid-to-offer ratio of 3.67x). Elsewhere, the average yield for OMO bills fell by 59bps to 5.21%; the yield on the 249-day OMO bill […]