Bond rally threatens FG’ s 2016 borrowing plans for N2.1trn deficit

Plans by the Federal Government in next year’s budget to double debt issuance to finance its budget deficit may not be enough to chekmate the ongoing bond market rally, National Daily investigations have shown.

Nigerian government bonds have returned 24.3 percent this year up till last week in local currency, according to Access Bank’s bond index

The 2016 budget draft released last week projects N1.2 trillion as domestic borrowing for next year, more than double the N570 billion of local currency borrowing embedded in the 2015 budget.

President Muhammadu Buhari had last week presented a N6.09 trillion appropriation bill to the National Assembly. The policy thrust of the budget included stimulating the economy and making it more competitive by focusing on infrastructural development; delivering inclusive growth; and prioritizing the welfare of Nigerians.

However, some analysts believe that the loose monetary and liquidity stance by both the Federal Government and the Central Bank of Nigeria (CBN ) are suggestive of the fact that yields could actually remain on the low side for some time to come.

Consequently, the development might negatively affect the much needed revenue to finance the deficit.
“There is the possibility of bond yields failing even more, while the short end of the curve remains depressed, despite increased domestic issuance.” says Samir Gadio of Standared Chartered Bank, London.

Nigerian fixed income yields have fallen sharply across all maturities as liquidity surged on the interbank money market in recent months, due to the Central Bank’s monetary easing.

Average yields on Nigerian sovereign bonds slid to 10.32 per cent last week from an almost seven-month high of 16.32 per cent in September.
The yield on benchmark 10-year bonds due 2022 traded at a low 11.1 per cent last week, a level not seen in the last three years.

Nigerian pension funds with assets under management of N4.93 trillion will probably be major investors in any new debt issued by the government, especially at the long end, with short term yields trading below October inflation of 9.3 per cent.

Pension funds allocated 63.7 per cent of their total assets to Federal Government securities as at June 2015, according to data from the regulator PENCOM.

With the short end of the curve already extremely depressed in the 1-6 per cent range on a discount basis, analysts say banks and pension funds could still push bond yields lower, amid supportive liquidity conditions.

“Given the unattractiveness of the equities market, coupled with the relatively low interest rates from Deposit Money Banks (DMB), we expect investors to skew towards longer term bond with seeming attractive yields,” analysts at Meristem Securities said in response to questions.

The Central Bank which is pursuing an unorthodox policy of easing rates and pumping liquidity into the system to support growth, despite the slide in oil prices (that has put pressure on the domestic currency) may not enter a tightening cycle for a while.

If bond yields overshoot on the downside, domestic market stakeholders could however be exposed to future duration losses if/when the rate cycle finally turns.

“There is a risk that bond yields back up aggressively once exchange rate considerations come to the fore and the authorities finally devalue the NGN to support the real economy and boost fiscal revenue.

In March 2010, the 20-year bond printed as low as 7 per cent, before yields backed up aggressively later that year: even though the context is somewhat different, this experience should be taken into account,” Gadio said.