Rush for bond market triggers price hike

Investors’ rush for the bond market, due to the lull in the equities market, has triggered overpricing of available bonds instrument in the Nigerian financial sector. Experts who spoke on the issue said the flight to safety by investors and the limited investment outlets in the market has triggered a scramble for bonds, thereby pushing the price to unrealistic levels. They also decried the sudden rush by banks to raise additional capital via the bond market, warning that the situation was reminiscent of the rush in the stock market between 2005 and 2007.

Bond-age

Sonnie Ayere, chief executive of Dunn Loren Merrifield, a Lagos-based full-service investment house, said, with the FGN bond currently selling at N189 and inflation at above 11 per cent, an 8.0 per cent yield was not enough to encourage investors to stake on bonds.

“Lending money to the federal government at 8.0 per cent for 20 years, for instance, does that make sense? Two things are likely to be happening: either there is flight to safety or the market is saying that the inflationary expectations of Nigeria over the next 20 years are not likely to change,” he said, adding that the absence of alternative investment outlet was causing a rush for the bond market.

The bond market is dominated by the FGN bonds which sell at a par value of N100. The Debt Management Office (DMO) has allotted N2.52 trillion in FGN Bonds since 2003 in tenors of 3, 5, 7 and 10 years while a 20 year bond was issued in November 2008. Total value of FGN bonds issued in 2008 alone stood at N491.96 billion.

Achieving realistic pricing

Mr. Ayere said there was the need for the DMO to issue inflation-indexed bonds, adding that this would help to create variety in the bond market. He urged the DMO to work with the National Bureau of Statistics and the Central Bank of Nigeria (CBN) in order to determine the inflation index to use.

Bola Onadele, president of Financial Datanet House Limited, said the absence of alternative investment window was putting pressure on the bond market. “Commodities market is absent; real estate market is not organised,” he said. “The only other alternative is the bond market. So everybody rushes in, higher demand, higher price, lower yield. We need to be careful here or we may face another problem. That is why we are screaming now.”

While calling for the setting of realistic benchmarks, he said the current level of tier one capital of banks may not be able to absorb another round of financial crisis. “I hope there is not another bubble in the financial market,” he warned.

According to him, the current foreign exchange volatility is good for the development of derivative instruments that would help to deepen the financial market and provide alternative windows for investors.

Attracting investors

Mr. Onadele also said investors are taking a second look at the intention of banks to raise funds from the bond market. “Investors are already wary of corporate bond floated by bank and are asking questions regarding safety. Bond of banks that ordinarily investors should have confidence in, they are calling to ask whether it is safe to buy such bonds. Something is not right,” he said.

In the last few months, several banks have received shareholders approval to raise additional capital through the bond market. They include First Bank of Nigeria Plc and United Bank for Africa Plc, to raise N500 billion each, while Diamond Bank Plc and Guaranty Trust Bank Plc plan to raise N200 billion each.

Micheal Oyebola, chief investment officer of Guaranty Trust Assurance Plc, which has over N14 billion in its portfolio, said the ‘herd’ mentality is imminent in the corporate bond market, since there was no other window for corporates to raise funds.

“While the influx of bank bonds deepens the market, it is not every instrument that will appeal to investors, adding that many of the issues being planned are not well thought-through by the issuer,” he said. “We recently asked an issuer why they want to raise funds. The answer was that it is because the pension fund managers have the money. I read of another one which stated in its prospectus that proceeds of the funds would be utilised on IT development.” He said institutional investors are asking the right questions in order to avert the crisis in the stock market where investments were not based on thorough scrutiny.