Foreign Investors Reduce Demand for FGN Bonds Auction-By Eromosele Abiodun

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Most foreign investors refused to participate in the FGN Bonds auction held last week, a development financial analysts traced partly to JP Morgan & Chase’s removal of the FGN Bonds from its Government Bond Index for Emerging Markets (GBI-EM).

As against their massive interest in previous auctions, THISDAY investigation revealed that the offshore presence in last week’s auction was very negligible.

Though the cover rate for the auction was healthy, THISDAY checks revealed that banks drove demand, favouring government paper with far lower returns than loans to the real economy.

JP Morgan had in September this year announced that it would remove Nigeria from its GBI-EM by the end of last month. JP Morgan had warned the Nigerian government that currency controls were making transactions too complicated.

Experts had warned that the removal would force hedge funds to sell Nigerian bonds, triggering potentially significant capital outflows and raising borrowing costs for the government.

Struggling with a plunge in vital oil revenue, Nigeria had imposed currency restrictions to defend the naira after the burning of dollar reserves failed to halt a slide. The JP Morgan Index tracks around $210 billion in assets under management.

However, last week’s auction of FGN bonds was notable for the strength of the total bid (N155 billion) and for the decline of 300 basis points (bps) in the marginal rates since the previous sale.

Analysts at FBN Capital attributed the high bid to the CBN’s boost to liquidity as a result of not holding open market operations on the maturity of NTBs since 29 September.

“They were supported by the Debt Management Office (DMO) decision to trim its offer to N50 billion, which helped to lower the marginal rates (effective cut-off points),” FBN Capital said.

The analysts added that half the banks that opted for the FGN bonds rather than lend to the economy are guiding their loan book expansion, which has so far this year moved from zero to five  per cent while some other bank’s has moved  between five  per cent and 10 per cent.

They added that the policy rate of 13 per cent now looks out of sync with the trend in yields.

“If it effectively guided banks’ lending and deposit rates, there would be a strong case for easing. Even though it does not, the MPC may decide to cut the policy rate when it meets the week after next,“ they stated.

Meanwhile, the FGN bonds tumbled during the week as investors sold off holdings to lock in profit at the over the counter market.

Analysis of trading showed that the 10-year, 16.39 per cent FGN January 2022 debt and the 7-year 16.00 per cent FGN June  2019 bond declined by N3.85 and N5.92 while corresponding yields rose to 11.87 per cent and 11.32 per cent. Also, the 5-year, 15.70 per cent FGN April  2017 paper and the 3-year, 13.05 per cent FGN August 2016 debt fell by N1.91 and N0.67 respectively, while yields advanced to 8.22 per cent and 4.88 per cent respectively.

Culled from Thisday