The nation’s bond market has enjoyed intense patronage over the last two years due to its relative safety, while offering good returns in the face of? downturn in the stock market. Stanley Oronsaye, looks at the trend and foresees that investors may be rearranging their portfolio in favour of shorter tenor instruments.
The Nigerian bond market holds mixed expectations for investors in the months ahead.
?? With the ongoing structural reforms in the financial sector, institutional investors, the major patrons of the bond market, may be looking at creative ways to manage their portfolio in the face of market volatility.
According to analysts, there is a growing uncertainty, with veiled optimism hinged on? government’s resolve to follow through on some of its policy projections. This is particularly so as foreign investors are watching the African bond market with cautious optimism.
More importantly, are the crises in the Eurozone which may have unforeseen consequences on the African bond market.
“We remain broadly constructive on the sovereign Eurobond asset class during 2012. In particular, we see the risks to a sharp rebound in the United States of America’s treasury, with the risks probably skewed towards lowering the US treasury yields for longer periods. In terms of the African index we are actually reasonably constructive,” stated analysts at Standard Chartered? Bank.
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BANK GROUP.
In the group’s latest African Market Report (AMR) for 2012, the picture painted is that of intermittent spikes in the midst of general market gloom. Much like other African countries, Nigeria’s bond market comes with its own cycle. “We are relatively neutral to negative on Nigeria, as they are trading reasonably tight and require a coherent structural adjustment strategy to start being delivered, in order to tighten the bond spreads much further. Although we are less bearish on oil prices for 2012, Nigeria clearly still remains extremely vulnerable to them moving sharply lower,” the report added.
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HOLDING TO MATURITY
The absence of an active secondary market means that most investors in the Nigeria bond market hold to maturity.
???? The implication is that banks hold bonds to maturity to avoid value erosion due to higher interest rates. According to Razia Khan,? Head of Research, Africa, at London-based Standard Chartered Bank, “This reflects the impact of recent aggressive tightening.” The Central Bank has however assured that it will keep interest rates on hold for the main time as it observes the financial landscape to determine which direction to go.
According to Standard Bank, it was taking a neutral to negative stand on Nigeria’s bonds as they are trading reasonably tight and require a coherent structural adjustment strategy to remedy. This is more so with the palpable volatility in the international price of crude oil, Nigeria’s basic economic mainstay.? “We remain constructive, given the extremely strong fundamentals. Yet the bonds have rallied hard already and we would probably look to dips to build larger positions.”
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TREASURY BILLS MORE ATTRACTIVE
Given the turbulence in the financial markets, discerning institutional investors are finding it more convenient to take a more medium term position rather? than wait for longer period. This makes the Nigerian treasury bills instrument, with lower maturity period, more attractive than bonds.
A report by Reuters indicates that, investors are willing to cash in on the more attractive returns on the treasury bills while they last.
“Yields are already dropping on long-term instruments because of the central bank’s decision to leave its benchmark interest rate and the reduction in government appetite for borrowing in the first quarter unchanged.”
The report added that expected strong interest in Nigerian treasury bills could drive down yields in the wake of the central bank’s decision to leave its benchmark interest rate unchanged at 12 per cent, while bonds yield are expected to remain steady.? The 3-year bond was trading at 15.67 per cent on Thursday, down from 16.35 per cent on Monday, and other tenors were displaying a similar pattern.? The perception of the market is that the current high yields on government securities may be moderated due to anticipated ease of the monetary policy of the CBN.
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