Eurobond yields dip first time in three weeks as investor optimism rises
…Dollar demand declines in Q3 2024 as invisible transactions drop
Nigerian Eurobonds have made a strong start to 2025, reflecting growing investor confidence in the country.
This comes despite a decline in dollar demand across various sectors of the Nigerian economy, also referred to as foreign exchange (FX) utilisation, which fell by 11 percent to $5.7 billion in the third quarter of 2024.
Average yields on Nigerian Eurobonds declined for the first time in three weeks, marking the first decrease since the country re-entered the Eurobond market in December. Analysts at CSL Stockbrokers attributed this decline to stronger-than-expected US economic data, including the Initial Jobless Claims and a rise in the ISM Manufacturing Purchasing Managers Index (PMI).
These factors spurred increased investor interest across the Eurobond tenures, pushing average yields down by 0.18 percentage points to 9.49 percent last week.
Similarly, analysts at Meristem Securities noted that the yield decline was primarily driven by heightened buying interest, as investors sought higher returns in response to improved market sentiment. They predict that the bullish trend is likely to continue this week.
“We expect the bullish sentiment to persist, although market participants may adopt a more cautious approach as they reassess global macroeconomic conditions,” analysts at CSL Research said.
On December 2, 2024, Nigeria successfully returned to the international bond market after a two-year hiatus, with demand surpassing the intended $1.7 billion offer by more than four times. The bond issuance was oversubscribed by more than $9 billion, with the federal government eventually raising $2.2 billion across two bonds.
The Nigerian government issued $700 million worth of 6.5-year Eurobonds maturing in 2031 at a coupon rate of 9.625 percent, and $1.5 billion of 10-year bonds at 10.375 percent.
During the week of the new issuance, the average yield across all Eurobond tenures fell to 9.18 percent from 9.66 percent in the previous week, driven by broad-based buying interest in the market following the two-year hiatus.
However, by the following week, ending December 13, the average yield increased to 9.36 percent, driven by profit-taking activity following recent bullish trends, compounded by a 0.10 percent rise in US inflation to 2.70 percent. This was further fuelled by market expectations of a potential rate cut by the Federal Reserve in its upcoming meeting, according to analysts at Meristem.
In the subsequent weeks, average yields on foreign bonds continued to rise, reaching 9.64 percent the following week and 9.67 percent by the end of last week, driven primarily by mild sell-offs across most tenures.
Meanwhile, dollar demand by various sectors of the Nigerian economy, or FX utilisation, fell by 11 percent to $5.7 billion in Q3 2024, largely due to a reduction in invisible transactions. This marks a notable decline from the previous quarter, with FX usage for non-physical transactions—such as services, travel, insurance, and remittances—falling sharply by 32 percent to $2.2 billion.
Data from the Central Bank of Nigeria’s (CBN) Quarterly Statistical Bulletin, compiled by FBNQuest, reveals that invisible transactions now account for approximately 39 percent of total FX utilisation, down from 51 percent in Q2 2024.
The financial sector, traditionally a dominant consumer of foreign exchange in this category, was the primary driver behind this steep quarterly decline. FX consumption by the financial services sector dropped by 34 percent quarter-on-quarter, totalling nearly $2 billion.
On the other hand, demand for foreign exchange for merchandise imports saw a modest 10 percent quarter-on-quarter increase, rising to nearly $3.5 billion. This uptick in demand for physical goods brought the share of merchandise imports in total FX utilisation to approximately 61 percent, up from 49 percent in the previous quarter.
Within the merchandise import category, the industrial sector emerged as the largest consumer, accounting for around 53 percent of the total forex used for imported raw materials, machinery, and equipment. Additionally, demand for foreign exchange for food products, the second-largest category in merchandise goods, rose by 16 percent quarter-on-quarter, totalling $633.6 million.
Overall, FX utilisation has been on a downward trend since the first quarter of 2023, mainly due to decreased demand following the significant devaluation of the Naira. However, with the CBN’s ongoing efforts to enhance FX liquidity and improve access to foreign currency, a modest rebound in dollar demand is expected in the coming months.
The CBN’s measures, which include streamlining FX trading and boosting market transparency, are expected to alleviate pressure on the foreign exchange market and facilitate more stable access to foreign currency across various sectors of the economy.
