What to expect from Nigeria’s bond auction

The Nigerian fixed income market has seen shifts in trading activity in recent weeks, with rates hovering at sub 0.5 per cent levels and market participants showing a preference for bonds at the mid- and long end of the curve. According to UBA traders, the lacklustre trading activity is expected to continue into the next week as yields have dropped across the curve. Dumebi Udegbunam, a Fixed Income Trader at UBA, shared insights on the market performance and economic factors influencing trading decisions. The recent Nigerian Central Bank's decision to maintain benchmark rates has supported demand in the fixed income market, resulting in a decrease in yields by seven basis points across the curve. Udegbunam highlighted the outcomes of the recent NCB auction and homo auction, where the CBN sold significant amounts, reflecting a subdued market with low liquidity. Despite positive economic indicators such as a decrease in inflation and improvements in GDP growth, the fixed income market witnessed minimal activity during the week, mainly centered around the auctions. Udegbunam noted a shift in investment preferences towards commercial papers and bonds at the longer end of the market curve, with concerns arising over the high yields on 20-60 and 20-45 bonds. Investors are evaluating the risk-return dynamics and considering Treasury bills in light of the current negative rates observed in the market. However, Udegbunam expressed optimism regarding the market outlook, dismissing the possibility of entering negative territory and emphasizing the potential for growth in the bond market in the upcoming months. Regarding external factors, the recent uptick in crude oil prices to a five-month high of $48 per barrel has bolstered Nigeria's foreign reserves, with projections of increased reserves in the next 60 days. Improved oil forecasts and positive sentiments in the equity market have contributed to a favorable outlook despite the global economic challenges posed by the COVID-19 pandemic. Udegbunam highlighted the significance of vaccine development and the potential economic recovery in 2021, emphasizing the importance of restoring confidence in the market. As the Nigerian economy navigates through the impacts of the pandemic and strives for recovery, questions arise about the future trajectory of interest rates and foreign investments. Udegbunam acknowledged the uncertainties but remained hopeful for a better 2021, backed by promising economic indicators and government initiatives to stimulate growth. The focus remains on achieving economic stability, restoring investor confidence, and fostering growth across various sectors of the economy.