FGN Eurobond Yield Rises as Market Weighs ECB, Fed’s Rate Hikes
Federal Government of Nigeria (FGN) Eurobond market traded bearish in the just concluded week, fixed income instruments traders said in their market report reviewed by Nairalaw.com.
The fixed income market has started weighing rates hikes in the global market space with the expectation that the effect will drill down to sovereign bonds pricing across the board – especially at the Eurobond market.
Jerome Powell, the United States Federal Reserve Chairman said in testimony at the congress and cited its hawkish poise that a 25 basis points rate hike is appropriate in March 2022. And European Central Bank has kept at raising rates to curb the inflation rate.
Eurozone inflation has jumped to 5.8% on energy and goods inflation increases
Last week, there was sell pressures on Nigeria’s Eurobond instruments, thus prices dropped and average yields across the curve rises 51 basis points to 7.99% amidst rising crude oil prices that signalled earnings accrued to Nigeria’s government has improved.
During the week, investors weighed the implications of frequent rate hikes by the European Central Bank (ECB) and the United States Fed amid growing inflationary pressures following skyrocketing commodity prices, according to Alpha Morgan Capital.
At the local market, investors were generally bullish in the secondary market as the value of FGN bonds traded increased for most maturities tracked, thus yield declined further.
Traders linked the bullish trading activities in the local debt market to healthier financial system liquidity. Specifically, the 10-year, 16.29% FGN MAR 2027 paper and 15-year 12.50% FGN MAR 2035 bond appreciated by N2.16 and N3.67 respectively; according to Cowry Asset Limited.
It was noted that these FGN Bonds’ corresponding yields fell further to 9.96% (from 10.46%) and 11.56% (from 12.10%) respectively. According to traders’ notes, the 20-year 16.25% FGN MAR 2037 debt and the 30-year 12.98% FGN MAR 2050 instruments were flat at 12.18% and 12.78% respectively.
The 24-JUL-2045 maturity bond witnessed a decrease in the yield of 15 basis points, while the 22-JAN-2026 saw an increase in the yield of three (3) basis points. Traders at FSDH Capital maintained that the secondary bond market is likely to remain subdued in the short term, a position the firm has held onto since the beginning of the year.
At the international capital market, the value of FGN Eurobonds traded this week depreciated for all maturities tracked on sustained bearish sentiment despite the rise in crude oil prices which suggest improved earnings for the Nigerian government.
Cowry Asset said in a market note that the 10-year, 6.375% JUL 12, 2023 bond, the 20-year, 7.69% FEB 23, 2038 paper and the 30-year, 7.62% NOV 28, 2047 debt lost USD0.84, USD3.18 and USD3.49 respectively. The instruments corresponding yields increased to 4.80% from 4.19%), 9.88% (from 9.43%) and 9.93% (from 9.48%) respectively.
“We expect to see increased bullish activity against the backdrop of boost in financial system liquidity. Albeit, we advise a cautious play in FGN bonds as FGN Eurobonds now return up to 10%”, traders stated.
The Federal Reserve released Fed Chair Jerome Powell’s semi-annual testimony to the House Financial Services Committee and in it he confirms the Fed’s desire to raise rates on March 16th. READ: Fitch Sees Two Fed Rate Hikes in 2022, Four in 2023
“With inflation well above 2 per cent and a strong labour market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month.”
He reiterates that raising the Fed funds rate is the “primary” tool used to tighten monetary policy, but they will also shrink their $9 trillion balance sheet.
This will “commence after the process of raising interest rates has begun, and will proceed in a predictable manner primarily through adjustments to reinvestments.” #FGN Eurobond Yield Rises as Market Weighs ECB, Fed’s Rate Hikes
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