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Global Policy Normalisation Induce Rout in EM Eurobonds

Jul 04, 2022   •   by   •   Source: FBNQuest   •   eye-icon 806 views

Today, we highlight activities within the Nigerian Eurobonds market as well as the broad African Eurobonds space. Year-to-date (YTD) 2022, yields on Nigerian Eurobonds have expanded by 528bps to an average of 12.8% compared with 7.52% at start of the year. Much of this uptrend in sovereign Eurobonds yields materialised in Q2’22,as yields jumped by 458bps alone in Q2’22. This trend is not peculiar to Nigerian sovereign Eurobonds as others sovereigns issued by other African countries and frontier markets have come under pressure in ytd 2022. 

 

The rapid increase in yields is mostly due to policy normalisation efforts by global central banks to stem the rapid increase in inflation. The rapid increase in inflation is caused by the twin impact of higher commodity prices (further worsened by the Russia-Ukraine conflict) as well as the rapid increase in consumer demand (post COVID-19), amidst slow recovery in production.

 

Based on data by FactSet, so far in 2022, at least 45 countries have raised rates in response to inflation. In the US, the Fed Reserve has raised rates three times this year, with its most recent 75bps rate hike in June (largest since 1994). Similarly, the Bank of England (BoE) has raised its policy rate five times this year (its most recent a 25bps to 1.25% in June).

 

These rate hike actions has forced global portfolio investors to lower their portfolio exposure away from emerging and frontier markets. This is as rates in developed markets have become more attractive and less risky, with carry trade opportunities thinning out. The sell-off has led to deep repricing in yields across frontier market Eurobonds including that of Nigeria.

 

Current market dynamics have made new Eurobond issuances difficult. Earlier this month, the Nigerian government shelved plans to raise an additional USD950m Eurobond due to unfavourable market conditions.

 

Only Nigeria and Angola have raised Eurobonds debt in 2022, with bond issuances at the start of the year. For Nigeria, the FG issued a 7-year Eurobond of USD1.25bn priced at 8.375% in late March, while the Bank of Industry (BoI) raised a EUR750mn Eurobond, maturing in 2027. In early April, Angola’s issued a 10-year USD1.75bn Eurobond, priced at 8.75%.

 

 

 

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