FGN Bonds Yields May Gradually Rise, Drop in June—FSDH
By Dipo Olowookere
Analysts at FSDH Research, one of the leading financial services firms in Nigeria, has predicted that the yields on the FGN Bonds may move up gradually from the current level before dropping around mid-year.
The firm said in a report released on Monday in addition, subsequent external borrowing by Federal Government may attract higher interest rates as yields in the global market move up.
FSDH Research made these observations in its report titled ‘FOMC Raises Rate: Should Nigeria Lose Sleep?’
This was in reaction to the raising of rates last week by the Federal Open Market Committee (FOMC) of the US Federal Reserve System.
The Federal Funds Rate (Fed Rate) was increased to 1.50 percent-1.75 percent from 1.25 percent-1.50 percent.
The FOMC announced the decision to raise the Fed Rate after its meeting on March 21, 2018.
FSDH asked that given the impact of the increase in the Fed Rate on the global financial market, should Nigeria be concerned?
It noted that the hike in the interest rate was in line with its expectation, 2.25 percent – 2.50 percent by year end.
According to the FOMC, the strengthening outlook of the US economy, the declining employment rate and the need to sustain inflation rate at 2 percent was the major reasons for the increase.
FSDH Research said it observed that between 14 June 2017 and 21 March 2018, the yield on the US 1.75 percent Treasury Note 2023 trended up as a result of hikes in the Fed Rate.
“We expect that a further increase in the Fed Rate will lead to additional increase in yield on the Treasury Note.
“The widening budget deficit in the US also supports increase in yields. Consequently, yields in the global market may increase,” the report said.
FSDH noted that the yields on the Nigerian bonds maintained a downward trend since August 2017 following the strategy of the Debt Management Office (DMO) to increase external borrowing.
The current yields on all the outstanding FGN’s Eurobonds are lower than the coupon rates, reflecting the low interest rate environment in the international market.
The FGN announced a drop in borrowing through the FGN Bonds in March 2018.
FSDH Research said it believes that the FGN will increase its borrowing through the FGN Bonds when the 2018 budget is signed into law, in order to cover its budget deficit.
“It may also increase borrowing from external sources in line with its debt management strategy,” it added.