BEVERLY HILLS, December 30, (THEWILL) – Investment analysts and financial market experts have adduced factors underlying the oversubscription of the December 2020 FGN N60 billion bond – when investors are exiting the fixed income market for equity.
The Federal Government of Nigeria through the Debt Management Office (DMO) revealed recently that it received total bids of N134.056 billion for December 2020 bond offer worth N60 billion, indicating it was oversubscribed by N74.056 billion (over 220%).
DMO stated that the rates of 6.945 per cent and 7.000 per cent for the 15-year and 25-year FGN Bonds, were higher than the rates of 5.000 per cent and 5.785 per cent at the previous auction in October.
“The rates reflect the level of interest rates in the market influenced in part by Monetary Policy actions,’’ it said.
Enigma, enlightenment
Industry watchers described the development as puzzling.
This is because investors’ appetite for fixed income market had waned tremendously in response to the near-zero yield recorded in that segment of the market.
On the contrary, the equity market has become investors’ bride since the end of the second quarter.
The Nigerian Stock Exchange (NSE) All-Share Index and market capitalization have hit unusually high points during the period to the delight of the multi-sectoral capital market investors.
Industry experts who spoke with THEWILL explained that investors are embracing unusual practice of “seeking comfort in uncomfortable zone”.
Prominent capital market player and Doyen of the Nigerian Stockbrokers, Mr Sam Ndata, said safety overrides interest (yield) when considering investment options.
The Chief Dealer/COO at Hedge Securities & Investment Co. Ltd, explained that the choice for the fixed income window amid worsening poor yield is driven by the desire for safety.
“Some are going to the equity market while many more opt for the fixed income market because it is not advisable to put one’s eggs in one basket.
“What is even more important is safety: People want a system that exudes confidence – where they can invest and go to sleep”, Ndata said in a telephone chat.
He argued that in a time of uncertainty like it is being witnessed in the Nigerian economy, investment choice is guided more by the assurance of safety than “volatile, high yield”, which may not be sustained and could drown investment.
Foremost stockbroker and former chairman, Association of Securities Dealing Houses of Nigeria (ASHON), Mazi Okechukwu Unegbu, said there are many Nigerians carrying excess cash who would not want to lose a kobo of their assets.
Unegbu said the present buoyancy of the equity market may not be sustained as it could be sending a wrong signal.
He said; “The present buoyancy of the equity market could be a wrong signal as there may not be strong economic fundamentals to sustain it.
“Yes, people do not want investment that yields nothing; yet no one wants to invest and lose his investment.
“There is too much cash in the system looking for safe places to go; the holders include our politicians. They would rather invest and receive a little than having their assets lost in any way.”
Sola Oni, author, educationist and financial market information systems expert, explained that bonds have overriding benefits against other investment instruments because of their inherent benefits.
According to Oni, bonds shield the investor against risk uncertainties and fluctuation.
“Bonds provide for capital preservation, volatility is lower than equity, they are liquid because the prices are fixed, they conform to the canon of lending and offer legal protection.
“Furthermore, bonds offer varieties of investment such as convertible bonds, zero coupon bonds, inflation-linked bonds and many others.
“In case of liquidation, bondholders are first to be settled; their benefits are also higher in case of asset-stripping (resulting from liquidation or bankruptcy)”, the former Capital Market Journalist explained in a telephone conversation.
Boniface Okezie, National President, Progressive Shareholders Association of Nigeria emphasized that investment is about returns.
“People want returns on their investment, no matter how small. Capital market will continue to grow notwithstanding the ‘mad rush’ towards bonds, because the stock exchange is the barometer of a nation’s economy and is recognized in that regard more than the bond market,” Okezie told THEWILL through telephone.
However, Paul Uzum, senior investment analyst, stockbroker and Assistant Vice- President at Planet Capital Limited, disagreed that the December 2020 FGN N62 billion was oversubscribed.
Uzum explained that the transaction was “manipulated” to give the impression of oversubscription.
According to him, oversubscription occurs when you fix a rate and allow bidders’ offers to be based on the prescribed rate margin prior.
“The government manipulated the transaction by basing its decision on a predetermined low rate. Why did it ignore the high-yield demanded by subscribers – ten per cent and above?” he asked.
Uzum argued that government wanted cheap money and insisted on getting what it desired which is not a fair deal.
“You fixed a ridiculously low-yield rate and forced subscribers to buy at that rate, ignoring those who bid higher because you said you wanted to discourage investments in fixed-income market; yet the economy is not favourable for real sector growth,” Uzum lamented in a telephone conversation on the subject matter.
Then, thereafter
In the past, fixed income investments (Bonds, Treasury Bills) were investors’ haven when yield curve rose as high as 14 per cent for a long while, to the detriment of the struggling equity market.
The scenario reflected in the investment inflow monitored by the National Bureau of Statistics (NBS) in their quarterly Capital Importation reports which showed high volume of inflow through Foreign Portfolio Investment (FPI) – mainly investments in stocks and shares.
In the bid to discourage investment in fixed income market and push attention towards funding the real sector, the CBN, through its tight monetary policy induced a sharp fall in investment yields in that segment of the market.
Consequently, returns in Treasury Bill, Bond and similar fixed income instruments sustained their nosedive curves to as low as below 1 per cent.
For instance, in the week of 14 December 2020, the CBN refinanced N7 billion worth of Treasury Bills via the primary market suffered lower rates for most maturities amid investors’ demand.
Consequently, stop rates for 364-Day instruments fell sharply to 1.139 per cent from the previous auction high of 3.20 per cent.
Similarly, stop rates for 182-day bill moderated to 0.50 per cent, from 0.60 per cent. Only one instrument – 91-day bill, rose from 0.01 per cent to 0.048 per cent.
Weekly data from FMDQ Securities Exchange showed that yields for 1 month, 3 months, 6 months and 12 months maturities fell to 0.24 per cent (from 0.31 per cent), 0.25 per cent (from 0.40 per), 0.39 per cent (from 0.48 per cent) and 0.75 per cent (from 0.79 per cent).
FGN Bonds are debt securities issued by the Debt Management Office (DMO) for and on behalf of the Federal Government and backed up by its ‘full faith and credit’.
The FGN has an obligation to pay the bondholder the principal and agreed interest (tax-free) as and when due.
The FGN issues bonds for numerous reasons which include financing government’s fiscal deficits, diversifying government financing sources, deepening savings and investment culture in the country amongst others.
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
