Bond Traders See Big Losses in Q1 on Rising Yields

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FGN Bonds

Nigerian bond traders are seeing some of sharpest losses on record in the first quarter of the year as yields rise on growing inflation expectations.

The S&P FMDQ Nigeria Sovereign Bond Index has sunk 16.64 percent over the past three months (Jan- March 2021), as 10-year benchmark bond yields rose to the highest levels since early 2020, according to data compiled by MoneyCentral.

Traders and investors see this dynamic extending into the rest of the year as inflation hit multi month highs of 17.3 percent in February 2021, and growth picks up in Africa’s largest economy.

The impact of the Central Bank of Nigeria’s (CBN) OMO regulation that restricted participation of non-bank corporates from OMO transactions is gradually fading out as yields recover across segments of the fixed income market, according to analysts at FSDH.

Yields in the FGN Bond market advanced in the first quarter of 2021 across tenors as the average yield increased to 9.39 percent as at March 16 2021 from 6.12 percent at the beginning of the year.

“The increase in yields was driven by week on week auction of OMO instruments by the CBN; introduction of the CBN Special Bill and desertion of the fixed income market for the equity market,” the FSDH analysts said.

“The federal government is positioned to borrow N5.6 trillion to finance the 2021 Budget which potentially could be higher at the end of the year as revenue remains constrained.”

The OMO yields had a similar story.

Like other fixed income instruments, yields in the OMO space are fast recovering.

Average OMO yield expanded to 6.89 percent at the close of March 16 from 0.58 percent at the beginning of the year.

The outcome in the OMO space is partly as a result of the introduction of CBN Special Bills, with the CBN expressing its willingness to raise rates in the year.

Analysts say rising inflation rate might also incentivize the CBN to auction more OMO instruments at higher rates in 2021.

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