‘Anticipated US rate cut boosts interest in Nigerian bonds’

Analysts have said that the anticipation of a rate cut by the United States Federal Reserve in September has stirred interest in high-yield foreign currency bonds from Nigeria, Gabon, and Kenya.

Minutes from the July meeting of the US Fed released on Wednesday indicated that officials moved closer to an interest rate reduction.

According to Bloomberg Report on Thursday, analysts posited that some of those debt securities as being mispriced and have scope to rally further.

The Bloomberg index of dollar-denominated sovereign bonds revealed that over the past month, bonds from all three had underperformed their emerging- and frontier-market peers.

Gabon’s bonds lost 1.2 per cent, Nigeria’s dropped 0.5 per cent while Kenya’s gained 1.1 per cent although it was behind the average 2.5 per cent return of securities in the index.

However, the report said that in the past week, those bonds had outperformed amid a risk rally fuelled by signs the Fed would ease policy in September.

Nigeria’s rising oil output and growing foreign exchange reserves, the analysts said were bolstering the economy and driving sentiments.

“Many African Eurobonds have already rallied strongly this year,” which could limit further gains for most of the continent’s frontier bonds, said a Cape Town-based portfolio manager at Allan Gray, Thalia Petousis.

“But investors are still using discernment around the underlying fundamentals,” she added, pointing to opportunities in Kenya after the unrest, which started in June.

Danish multinational banking and financial services corporation, Danske Bank, said Nigeria “looks very attractive, with higher FX reserves, rising oil production and continued reforms – despite the riots spreading from Kenya.”

Nigeria’s oil output has risen to 1.75 million barrels per day of crude and condensates in August, with NNPCL projecting that output would rise near two million barrels a day by the end of the year.

Also, external reserves stood at $36.45bn as of Wednesday based on Central Bank of Nigeria data.

On yield outlook, a senior credit research analyst at REDD Intelligence, Mark Bohlund, said Nigeria has a potential for eurobond yields to tighten, saying, “The external accounts are also in a relatively strong state, but uncertainty over economic policymaking is still high.”

Bohlund is also bullish on Gabon, where yields don’t reflect oil output being at multi-year highs.

“The yields largely reflect uncertainty about the spending plans of the current military junta, heavily influenced by the very negative International Monetary Fund report released in May,” he said.

For portfolio manager at London-based Abrdn Investments Ltd., Kevin Daly, “African high yielders will generally benefit from Fed easing, with high beta names such as Nigeria, Kenya and Angola likely outperforming in the region.”