Yields on Nigeria’s Eurobond traded at 5.90 percent on Monday and rose sharply by 25bps to 6.15 percent the following day, in reaction to market volatility predicated on renewed investor concerns about potential defaults by Portugal on its sovereign debt. Yields on Portuguese Government bonds climbed to higher levels.
Analysts said the attractive yields in emerging market are compelling foreign investors to sell off bonds from frontier markets like Nigeria, to deepen their position in high yield emerging markets. As a result, the price of Nigeria ’s bond dips with yields on the upside.
Charles Robertson, Global Chief Economist and Head of Macrostrategy, Renaissance Capital, said because investors get scared by events in Europe , some choose to sell risky bonds and buy safe bonds. According to him, ‘risky bonds are those issued by countries with sub-investment grade ratings, such as Nigeria. They buy safe bonds such as US treasury bonds or German bunds. This is why Nigerian yields rise when news out of Europe gets worse’.
Concurring, Foluwa Oguntoyinbo, analyst with Afrinvest West Africa, informs that movements in Eurobond prices and yields are caused and affected by various factors, some based on the issuing country’s macroeconomic/socio-political environment and its domestic economy, and others on global events.
The Nigerian case being no different, with issues ranging from economic reforms, to insecurity, crude oil prices, volatility in the exchange rate and global events, like the euro-zone crisis.
“The euro-zone crisis adversely affects price movements on the Nigerian Eurobond on many fronts. One of these fronts is trade – Nigeria exports a sizeable chunk of its crude to Europe, therefore reductions in household expenditure in Europe, portend downside risks to oil revenue growth in Nigeria . Nigeria ’s total revenue is largely dependent on oil revenues, and any threat to its sustenance will make investors wary.
Another is the probability that European investors are caught up, or more concerned with the crisis in that region, and have therefore reduced trading activities on the Nigerian Eurobond, or are being cautious and waiting on the sidelines, pending when the Euro- zone crisis abates.
A more remote front could be the adverse impact of the recent reduction in FDI flows and aid by European countries (with the euro-zone crisis and insecurity issues in Nigeria as part of the causative factors)”
Jide Nwaogwugwu, head, Investment Research at Dunn Loren Merrifield, said the major investors in the international markets are from that zone, and that as such, when their market is volatile, it affects their appetite for investment. He added that Nigeria was a frontier market, while most countries affected in the Euro- zone were emerging markets.
“In this regard, they will always demand for higher yields on securities issued by an issuer like Nigeria, than they would demand of emerging markets, whose yields have gone up relative to the crisis.”
With emerging market bond yields averaging 6 %, compared with 3.5% globally, analysts believe there is potential for new capital inflows into the asset class. However, the volatile nature, coupled with their strong sensitivity to global trends and asset price cycles, they said, makes them a risky investment.
“They tend to outperform significantly when global markets are in a good mood and are subject to larger profit-taking moves when conditions sour,” said Nick Chamie, global head of emerging markets research at RBC capital markets.
Chamie also believes investors’ risk appetite is going to determine at least in the short run, emerging market asset performance, particularly regarding the concerns associated with the economic turmoil in the Euro-zone, political risks in the Middle East and North Africa , and mounting fears of a deeper recession in the global economy. His expectation going forward, is that “things will be rocky.”
