Nigerian bond prices will be supported by the market's likely inclusion in the JP Morgan government bond index. Kenyan and Ugandan yields are also set to fall at auctions next week.
Nigerian bond yields are expected to ease further next week as news of the country's likely inclusion in the JP Morgan government bond index heightens offshore investor interest in its debt.
Nigeria is likely to be included in JP Morgan's Government Bond Index - Emerging Markets (GBI-EM) from October, potentially bringing up to $1 billion into one of Africa's most developed debt markets, the bank said on Wednesday.
Dealers said the announcement spurred a rash of buying, pushing down yields across the board.
The yield on the most liquid bond, the 3-year, fell to 15.60 on Friday from 16.17 percent a week ago. That on the 5-year instrument dropped to 15.70 percent, compared with 16.28 percent last Friday.
“We expect a lot of foreign investors to rush for local debt in the coming days in response to the report on JP Morgan and this will further push down yields,” one dealer said.
Nigeria's Debt Management Office sold 75 billion naira ($478 million) in bonds with maturities ranging from 5 to 10 years at a monthly auction on Wednesday. The yield on the 5-year paper was marginally higher, while those on the 7- and 10-year securities fell.
Dealers said a lower-than-expected inflation figure for July would also support a further drop in yields. Consumer inflation eased marginally to 12.8 percent year-on-year, from 12.9 percent in June, surprising analysts who had expected it to rise due to the partial removal of fuel subsidies in January.
A Treasury bill auction in Uganda next week is likely to be heavily oversubscribed, but offshore investors may shun the east African nation's debt for more attractive markets like Ghana and Nigeria.
The Bank of Uganda will offer a total of 75 billion shillings ($30 million) in 91-, 182- and 364-day bills on August 22 and traders said they expected a significant fall in yields given high levels of liquidity.
“The Treasury bill auction will be three times oversubscribed and yields will probably collapse an additional 100 basis points,” said one trader. “There's 440 billion shillings outstanding in repo transactions with the central bank so all that money will be flowing back into the system next week.”
Yields on 2- and 5-year bonds sold on Wednesday dropped more than 100 basis points. The central bank offered a combined 100 billion shillings and received bids worth nearly triple that amount.
The yield on the 2-year bond declined to 13.34 percent from 14.84 percent when it was last auctioned in July, while that on the 5-year paper fell to 13.91 percent from 15.39 percent in May.
The last Treasury bill auction on August 8 was also highly bid, with the yield on the 91-day instrument tumbling more than 300 basis points to 14.42 percent.
Foreign participation will probably be limited as offshore investors look instead to Ghana and Nigeria, where Treasury bills are yielding above 20 percent and 16 percent respectively.
“Foreign participation in Uganda has slowed down, with other markets appearing to be more attractive,” the trader said.
High demand for Kenyan government securities, driven by increased liquidity after investors redeemed billions of shillings in debt, is expected to drag yields lower at next week's Treasury bill and bond auctions.
Tumbling inflation and broad expectations of another rate cut by the central bank next month have sent investors rushing to lock in high returns on the debt market.
The bank is scheduled to auction a new 2-year Treasury bond worth 10 billion shillings ($119 million) on Aug. 22, alongside 91- and 182-day Treasury bills worth a total 8 billion shillings.
“Banks have liquidity and would rush in for the 2-year paper. I expect all the papers next week to be oversubscribed,” said Mercy Njoroge, a trader at Tsavo Securities.
Commercial banks have been shifting their attention back to the bond market after returns on Term Auction Deposits - repos with maturities of between 14 and 28 days - fell below Treasury bill yields. Inflation plunged to 7.74 percent in July, from 10.05 percent the previous month, also making government debt more attractive.
At auctions this week, investors bid 33.2 billion shillings for the 8 billion offered by the central bank in 182- and 91-day securities, dragging yields lower as the bank rejected high bids.
Traders expected yields on the 2-year paper to fall below 12 percent at the auction, while those of the Treasury bills could edge down towards 9 percent in oversubscribed sales.
“The central bank is mopping up shillings, but liquidity remains significantly high and with rates on the money market falling, the bond market offers the next best returns,” said one trader at a commercial bank. - Reuters