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Federal Government of Nigeria’s decision to tap the international debt market with a view to refinancing domestic debt and reducing local borrowing costs could trigger yield curve normalization.
Investors historically have viewed the shape of the yield curve as a signal of future growth.
The yield curve compares interest rates at different maturities, typically the spread between yields on one- and 10-year bonds.
Ten-year yields historically have reflected the market’s growth and inflation outlook, while the short end of the curve is mainly tied to market expectations for central bank rates.
The normal yield curve is one in which short term debt instruments have a lower yield than long term debt instrument of the same credit quality.
Fixed Income analysts have agreed that the narrow difference between yields on shorter term paper of 15.40 percent and the yield on long term dollar denominated debt of 13.80 percent means there is significant downward pressure on short term interest rates.
However, they add that yields on short term securities may not go down further as the central bank could mop up or stem liquidity by intensifying on Open Market Open (OMO) issuance with a view to attracting foreign investors.
“Because federal government plans to bring down borrowing costs, they are going to reduce their borrowing in treasury bills and that will suppress the short term interest rates,” said Wale Okunrinboye, a fixed income and FX analyst at Ecobank Group.
“More money is going to come into the system and that will depress yields at the segment so short term interest rate will start declining. Last year short term rates were higher than long term rates,” said Okunrinboye.
Nigeria recently sold $2.5bn worth of Eurobond via a dual series offering of 12 year and 20 year tenors, priced at 7.143% and 7.696% respectively.
Investors have flocked to Nigerian Eurobond as improved oil production and a flexible exchange rate helped the country exist its first recession in 25 years.
Inflation which is a bonds worst enemy because it moves in inverse proportion to price, fell to 15.10 percent for a 12 consecutive month in January 2018, according to a recent report by the National Bureau of Statistics (NBS).
Finance Minister Kemi Adeosun said recently that the country plans to redeem N762.5 billion worth of treasury bills and that it would save government N64 billion each year after the refinancing is completed.
Eurobonds make up more than a fifth of Nigeria’s $15.35 billion foreign debt portfolio as of September and more than half of interest paid in the third quarter, according to data from the Debt Management Office (DMO).
Nigeria’s Eurobond portfolio now stands at $8.5bn (or $8.8bn if the $300 million diaspora bond is included), and the total external borrowing is $20.9bn, narrowing the NGN-USD debt mix to 66:34 (compared to 73:27 in Sept-2017), according to data compiled by research house United Capital Limited.
“This indicates that the FGN is one step closer to its fiscal desire to adjust the debt mix to 60:40 by 2019,” said analysts at United Capital.
Ayodeji Ebo, managing director and CEO of Afrivest Securities Limited argued that while an increase in Gross Domestic Product (GDP) in 2017 after shrinking by 1.58 percent in 2016 presents an opportunity to raise cheaper funds, the expected hike in interest rates by the United States Federal Reserve (Feds) may negate this opportunity.
The U.S 10-year Treasury yield spiked and held above 2.9 percent on Federal Reserve Chairman Jerome Powell’s assessment that the central bank won’t rush to raise rates even though he expects the economy to pick up steam.
BALA AUGIE
