To lure investors to the long end of its yield curve while securing some wiggle room for domestic debt servicing in the short-term, Nigeria offered to pay bondholders higher than it has paid in more than a year.
“I get a sense that Nigeria, worried by its inverted yield curve, is trying to ensure more of its loans mature in the long-term so that there is some wiggle room for debt servicing in the short-term,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham by phone.
Nigeria’s yield curve is inverted because short rates have outpaced long-term rates on the back of the Central bank’s liquidity mop-up through Open Market operations (OMO) to defend the naira, reeling from a big devaluation against the US dollar in June.
At the last bond auction (December 14), the Debt Management Office (DMO) offered 16.24 percent and 16.43 to investors, for debt maturing in 2026 and 2036, the highest yield offers since March 2015, according to CBN data.
Fund managers say they expect higher yields in 2017.
“Nigeria’s 2017 fiscal road-map indicates that the country would extend its debt maturity to create breathing space for debt servicing,” one fund manager who declined to be named told BusinessDay.
“On the back of this, expectations are that bond yields may surge further to compensate investors for holding naira assets for longer periods,” the fund manager added.
If bond yields increase and become more attractive than short-term debt instruments, it is positive for the private sector in the sense that borrowing costs are likely to fall, according to Ibrahim of Chapel Hill Denham.
This is because demand for short term government securities may begin to cool and in the short term, may encourage lending at lesser interest rates by commercial banks to the private sector.
Nigeria’s domestic debt service in the first six months of 2016 came to a total of N641.68 billion, according to the Debt Management Office (DMO).
This means the country spent 21.4 percent or N113.14 billion higher in the first half of 2016, than it did in the same period of 2015, when it spent N528.53 billion.
Experts say rising debt service costs are fuelled in part by rising interest rates especially on short-term debt, which have soared as high as 18 percent this year.
Worried by piling debt maturities and what it would cost to settle them, Kemi Adeosun, the Finance minister plans to rebalance the country’s public debt portfolio by taking more long-term loans and increasing external borrowing.
Benchmark interest rate (at 14%), though unchanged in the previous two Monetary Policy Committee (MPC) meetings is 300 basis points higher than it was at the start of the year (11% in January).
The country’s interest rate is the second highest in sub-Saharan Africa, trailing Angola’s 16 percent by 200 basis points, while it is 700 basis points higher than South-Africa’s 7 percent.
Although the yields on the 10-year and 20-year bonds were attractive enough for investors, Nigeria’s five-year bonds, offered at 15.8 percent, returned undersubscribed, as the bid to cover ratio was 0.3 percent.
A bid to cover ratio above 2.0 indicates a successful auction comprised of aggressive bids. On the other hand, a ratio below 1 percent is an indication of a disappointing auction, marked by when investor demand for government securities at anticipated rates is below expectation.
Yahya Chami, head of private equity at First Asset Management, said rising inflation is one reason why investors looked away from the 5-year bond.
“Investors probably want a risk premium for the 5-year bond, understandably, given that inflation is spiralling and it has made government securities volatile,” Chami said.
Inflation accelerated for the thirteenth consecutive month in November to 18.4 percent, even as the central bank left its main lending rate at a record-high to balance price pressures with supporting a slumping economy.
Traders said investors demanded a premium close to November’s inflation rate on the 5-year bonds which was above the mid-point at which the Debt Management Office (DMO) wanted to issue them.
The DMO ended up raising N69.2 billion ($227 million) in bonds maturing in five, 10 and 20 years’ time, N25.8 billion less than the N95 billion it had wanted. The reduction was driven by low turn-out for the 5-year bond, as the DMO was only able to lock in N3.2 billion instead of an intended N35 billion.
“It implies that investors are not so confident of the country’s macro-economic fundamentals in the next five years,” one bond trader who did not want to be named said.
However, Nigeria’s central bank sold more treasury bills than it offered at an auction on Wednesday, after the bond auction disappointed.
The CBN raised N147.48 billion ($484 million), higher than the N83.24 billion naira it originally advertised, and yields remained unchanged at the auction.
It sold three-month paper at 14 percent to raise N39 billion and offered 17.50 percent for six-month bills which fetched N23.02 billion.
It paid 18.68 percent for the one-year bill worth N85.46 billion.
Total subscriptions at the Treasury bill auction stood at N185.97 billion, up from N156.56 billion at the previous sale last month, data from the central bank showed.
“The offer yields at the Treasury Bill auction were not increased unlike the bond yields. Maybe the government will actually encourage long term debt going forward and find a way to lure T/Bill investors to the long end of the yield curve,” one bond trader told BusinessDay.
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