Analysts Lower Expectation on Yields Upticks
With unsettled market dynamics in the Nigerian economy, Afrinvest, a leading investment firm in the country has reduced expectations of upticks in yields on fixed interest securities for the second half of 2022.
Though, the market has seen yield repricing following a fast and furious hawkish move by the Nigerian monetary authority in May, where the policy committee booked a 150 basis points increase in benchmark interest rate.
Though market adjusted, headline inflation pressures persist, hitting 17.71% in May, while analysts’ consensus indicates price level would stay hot for the rest of the year.
In its market report, Afrinvest noted that said it maintains a bearish outlook although the investment firm hinted that it has lowered expectations of upticks in yields to reflect the prevailing market dynamics.
In its outlook for 2022, Afrinvest had predicted an increase in domestic bond sales to exceed the ₦2.6 trillion budgeted to an estimate of ₦3.1 trillion in 2022.
“While our forecast was spot on, the shelving of further Eurobonds sales for the remainder of 2022 after a $1.25 billion issuance in the first half of 2022 means the domestic target might increase to ₦5.6 trillion in 2022 as DMO turns to the local market for additional financing”.
Following an adjustment to the fiscal year 2022 spending plan by lawmakers, Nigeria’s supplementary budget lifted domestic borrowing target to ₦2.6 trillion. On that note, Analysts said in the report that based on the new estimates, there would be legroom for issuance of up to ₦3.6 trillion in the second half of 2022.
“We estimate total inflows – including in and outs- in the second half of 2022 at ₦2.8 trillion compared to ₦4.6 trillion in the first half of 2022, with FGN bond coupon payments accounting for 15.9% of total inflows.
Afrinvest analysts said they still entertain the possibility of OMO rate hikes to incentivise foreign portfolio inflow as part of attempts to improve the attractiveness of Naira assets.
“Our view is premised on the decoupling of the Monetary Policy Rate (MPR) from key market rates including OMO rates. For instance, although the MPR was unchanged at 11.5% in 2021, OMO primary market rates were adjusted upwards by the CBN in Q1-2021 to lure hot money, driving the short end of the curve upward in the secondary market”, Afrinvest explained.
The firm detailed that the outcomes in recent pre-election years have pointed to an uptick in yields, noting that these trends can be explained by social unrest, uncertainties in a business environment associated with pre-election permutations, combined with a need for better real returns amid inflationary pressures priced into yields.
Considering the factors in play, analysts said they expect FGN bond yields to close the year at around 12.7% down from 13.0% projected at the start of the year. This prediction according to analysts could be altered if FG access funds via Ways and Means Financing.
Also, a pause in global hawkish policy bias could dissuade the anticipated OMO hike by CBN while a leaning of the DMO towards external and concessionary debt sources could reduce domestic borrowings. #Analysts Lower Expectation on Yields Upticks
