The Bond market (also known as debt market or credit market) is an integral aspect of the Capital Market in Nigeria. Over the years, Bonds have grown to become very essential in the country’s development, especially since the establishment of the Debt Management Office (DMO).
Essentially, a Bond market is a financial market where participants can issue new debt known as the primary market, or buy and sell debt securities known as the secondary market. Although Bonds are the mostly issued form of debt, it may also include Notes, Bills, and some other forms for both public and private uses.
According to the Securities Industry and Financial Markets Association (SIFMA), the estimated size of the Bond market (total debt outstanding) worldwide is around $119 trillion. The US market accounts for $46 trillion, representing about 39% of the global Bond market.
Bond market participants are similar to participants in most financial markets and are essentially either buyers of funds i.e. debt issuers or sellers of funds and most times can be both. They include Institutional Investors, Governments, Traders, and Individuals.
The main Institutions in Nigeria’s Bond market are The Debt Management Office (DMO), The Central Bank of Nigeria (CBN), The Nigerian Stock Exchange Group (NGX Group), The Central Securities Clearing Systems Plc (CSCS) and The Securities and Exchange Commission (SEC).
Nigeria’s Bond Market Instruments include the Federal Government of Nigeria (FGN) Development Stocks, the Federal Government of Nigeria (FGN) Treasury Bonds, the State and Local Governments Bonds, the Corporate Bonds, the Municipals, Mortgage-Backed, Asset-Backed, and Collateralised Debt Obligations.
The Securities and Exchange Commission (SEC) has facilitated the growth of the Bond market, which is dominated by Government Bonds. For example, the Federal Government of Nigeria (FGN) is the main issuer of Government Bonds. Similarly, the Sub-Nationals (States and Local Governments) issue state Government Bonds and Local Government Bonds.
The global credit market in aggregate is said to be about three times the size of the global equity market. The Government Bond market is a vital part of the Bond market in countries around the globe, owing to its size and liquidity. When it comes to measuring credit risk, Government Bonds are usually used in comparison with other Bonds.
Due to the inverse relationship between Bonds and interest rates i.e. yields, the bond market is oftentimes used to point out changes in interest rates and/or the measure of cost of funding.