July 16, 2021/CSL Research

In July, performance at the bond secondary market has been mixed, with signs of an inflection point from the bearish sentiments witnessed from the start of the year. In our view, this pattern is being largely driven by the liquidity, as expected maturities and coupon payments across all instruments are estimated at N1.65tn in July 2021. Nevertheless, while we understand that the market has been oversold by investors and valuations are looking seemingly cheaper, fundamentals still support a continued rise in yields based on three major factors. 

Supply side factors: we estimated that the DMO has net-issued c. N1.85trn in H1 2021, which is about 79% of its planned domestic borrowing in 2021. This implies domestic supply will be relatively thinner in H2 2021. However, adjusting for the recently approved supplementary budget (N982bn), and assuming all the deficits will be sourced from the domestic market, then net issuance so far this year will be only 56% of total planned borrowing. 

Monetary policy: From the CBN’s point of view, the FX reserve has continued to decline, as the gains from higher crude oil prices are masked by the crude oil production cap of 1.5mb/d from the OPEC + agreement. As such, OMO becomes the only viable option for attracting the badly needed FX, safe for a Eurobond issuance. Hence, bias is for MPC to turn hawkish in H2 2021, especially in the face of two consecutive positive GDP growth quarters. 

Liquidity and demand side factors: Over the second half of the year, total OMO maturities are estimated at N1.2trn, this is 3.5x lower than the maturities in H1 2021. Beyond this, bond coupon payments are poised to remain significantly low in H2 2021.

Based on all these factors, we expect investors to demand higher rates at auctions, which will support a rise in secondary market yields. Overall, we think investors will rather hold their wins, than trade at the secondary market.