Bond Market Update: The odds remain in favour of low interest rates

Bond Market Update: The odds remain in favour of low interest rates

Last week, the Debt Management Office (DMO) on behalf of the Federal Government of Nigeria (FGN) published the Bond offer circular for Oct-2020. To the surprise of many market participants, the circular revealed that the FGN plans to raise only N30.0bn split equally between the re-opened 15-year and 25-year notes, at the auction scheduled for today (21/10/2020).

Notably, the expectation of low paper supply at the primary market auction and the robust state of the financial system, liquidity has since spurred buying frenzy at the secondary bond market, with yields collapsing to the lowest level since data became available in 2007. This is despite the existence of pressures that continue to stoke headline inflation rate higher – with the latest Sept-2020 figure showing inflation is now at a 31-month high of 13.71% y/y while 30-year note issued during the period was sold at the rate of 8.94%.

Overall, our estimate showed that the DMO has already issued above 90.0% of its planned
domestic issuance for the fiscal year 2020.

Accordingly, this suggests the government supply of securities will remain thin for the rest of the year even as liquidity at the interbank market remains buoyant, thanks to expected inflows from OMO maturities (N3.3tn), and three outstanding FAAC disbursements before the year ends. Against this backdrop, we expect rates at both the primary and secondary bond market to remain depressed till the end of the