A Shift in Market Trends
FGN bond yields, which recently reached record highs, have now dropped to their lowest levels since issuance. This decline became evident during Monday’s auction as the Debt Management Office (DMO) opted for shorter-term instruments to handle its debt obligations more effectively.
The yield on the February 2031 bond fell sharply to 19.33% from the previous month’s peak of 22.50%. Similarly, the April 2031 bond yield dropped from its record high of 21.79% to 19.20%.
Unexpected Market Reactions
Before the February auction, investors were expecting high returns on the newly issued January 2035 bond, which debuted at a yield of 22.6% last month. However, market sentiment shifted suddenly when, just one business day before the auction, the DMO unexpectedly withdrew the January 2035 bond from the reopening schedule.
This last-minute decision disrupted market liquidity and affected trading strategies. Matilda Adefalujo, a fixed-income analyst at Meristem, interpreted the move as a strategic attempt to manage borrowing costs.
“The longer the bond’s maturity, the higher its yield. It seems the DMO prefers raising capital through shorter tenors to better manage its debt obligations,” Adefalujo explained.
The impact was immediate, with a significant rise in investor participation at the February auction, leading to lower yields for the available instruments.
High Demand for Shorter Tenor Bonds
At the auction, the DMO initially offered N200 billion for its April 2029 bond. However, investor demand surged to N465 billion, prompting the agency to sell N305 billion at a yield of 19.20%.
Similarly, for the February 2031 bond, demand skyrocketed to N1.116 trillion—eight times the initial offer—resulting in N605 billion worth of sales.
In total, the DMO raised N910.39 billion from the auction, marking a 50% increase compared to the N606.50 billion raised the previous month.
Shifting Market Participation Dynamics
Market analysts observe that this shift has altered how investors approach both primary and secondary bond markets. Many investors, who had previously hesitated to buy in the secondary market despite attractive yields on the January 2035 bond, were caught off guard by the primary auction results.
Kehinde Awonusi, a fixed-income trader and Executive Director at Vega Securities, highlighted the changing landscape. “The strategy of waiting until auctions to buy bonds is no longer reliable—the market has evolved,” Awonusi stated in a LinkedIn post.
Advice for Investors Moving Forward
Analysts now encourage investors to take advantage of current bond prices while they last. With rates declining, locking in yields at these levels may not be possible for much longer.
“Now is the time to add bonds to your portfolio. Rates at these levels won’t last forever. Bonds retain their value until maturity and offer semi-annual coupon payments,” advised Balogun Efe, founder of wealth management firm AyoolaInvesting.
As the bond market continues to shift, investors will need to stay proactive in their strategies to maximize returns and adapt to the evolving financial landscape.
