BY CHARLES ABUEDE
Data for the month of February just made available by the National Pension Commission (PenCom) indicate that the exposures of pension managers to federal government debt securities accounted for 62 percent, the largest chunk, of the pension industry’s total assets.
As a result, federal government securities rose two percent month on month to N8.5 trillion, while the pension fund administrators’ (PFAs) exposure to government bonds also rose significantly, accounting for 59 percent of their total assets under management (AuM) which currently stands at N13.8 trillion.
Although industry experts have expressed anticipation for more yield expansion in the second quarter of 2022 as a result of the lower values of maturing securities which are expected to hit over N1 trillion, as well as the expected increase in the supply or inflow of federal government papers into the market this quarter through the Debt Management Office (DMO), fund administrators are highly optimistic that the debt office’s activities in the fixed income market this quarter will exceed what was recorded during the first quarter (around N720 billion).
Since the beginning of the year, average yields in the fixed income market have continued to wane due to the spreading out of liquidity in the system, and chiefly supported by the federal government’s drive to keep the cost of borrowing down.
Official data showed that the results of the FGN Bond auction for March 2020 reflect an average coupon rate of 11.43 percent compared to 11.98 percent in the previous month.
Consequently, Lead Assets fixed income analysts documented that in the primary market the total FGN bond issuance this year so far is N450 billion, same as was recorded for the same period in 2021, while the total bid so far is N1. 41 trillion, up 85.28 percent from N761.27 billion recorded for the same period in 2021; upon which they expect the trend to continue beyond April 2022.
Also, in the secondary market, the average yield for FGN bonds at the end of March 2022 was 10.59 percent, down from 11.08 percent in February. Meanwhile, the average bond yield was depressed by the decrease in yields for shorter tenured bonds.
Back to the pension industry in Nigeria; the regulated pension industry’s total assets under management (AuM) increased by 12 percent year on year to N13.8 trillion as of end-February 2022. Thus, the overall AuM climbed marginally by one percent month on month from January’s level of N13.6 trillion.
Similarly, the report showed that the total pension accounts increased by over 324,000 to 9.6 million relative to the comparable period of 2021.
Analysis of the data highlights that the industry’s total holding of domestic equities increased by N17 billion month on month to N977 billion, the share of asset allocation was unchanged at 7.1 percent, while the allocations to fixed income assets largely reflect the asset class’s relative depth and higher activity levels compared with equities.
Meanwhile, it was seen that due to a surge in liquidity from maturing securities and coupon payments totalling over N3 trillion in the first quarter, yields compressed by roughly 120 basis points across the curve during the quarter, and as such, FGN bonds saw a mixed performance across the curve in the first three months of 2022, with activities majorly in the mid-to-short end of the curve, due to broad expectations of a pick-up in yields.
Industry experts at FBNQuest Capital commenting on the development, said in a note: “Using our universe of coverage as a read-across, we see that FGN bond yields have increased by almost c.50bps on average over the last month. We continue to expect to see some more yield expansion through Q2, due to the lower value of maturing securities during the quarter (estimated at over N1 trillion) relative to Q1, and the DMO’s expected increase in the supply of FGN paper to the market.
“In comparison to Q1, the DMO’s upper limit for its auctions based on its issuance calendar is up 50 percent quarter on quarter to N720 billion. It is extremely likely that actual sales at its auctions will considerably exceed this number, just as we observed in Q1. On the flip side, existing bond portfolios will see some mark-to-market losses due to the yield expansion,” they opined.