Firm Sees Yields Rising as Fund Managers Sell Short-dated Bills
Liquidity pressure and the Central Bank of Nigeria’s (CBN) restrictive monetary policy are expected to keep yields upward in the fixed income market, according to an investment firm, noting that fund managers are converting short-dated treasury bills to cash.
In the fixed income market, average yields on government instruments have inched upward since the monetary policy committee of the CBN turned hawkish in a fast and furious manner.
The Benchmark interest rate was adjusted upward by 2.50% to 14% in less than 3-months after two years of driving a low-interest rate environment. As a result, spot rates on Treasury bills have continually increased as market participants demand a higher return to compensate for rising inflation rate.
In its fixed income market note, Cardinalstone’ a multi-assets investment firm hint that the outlook for yields remains biased to the upside, with sustained liquidity pressures and restrictive monetary policy likely to remain the key drivers.
The firm recalled that the CBN, which recently adjusted the interest rate on saving deposits from 10% of MPR to 30% of the monetary policy rate (MPR) will likely intensify hawkish policies to curb demand-side inflationary triggers such as speculative dollar demand, which has a materially”
“From a tactical standpoint, fund managers are likely to continue selling down the relatively unattractive short-dated Nigerian Treasury bill holdings below 90 days maturity to obtain quick cash for onward investment in higher-yielding placements, which offers between 15.0% and 16.0%.
The investment firm noted that FX market illiquidity and capital control measures of the CBN have continued to result in material difficulty in foreign funds repatriation. Notably, international air carriers, whose FX backlog was estimated at $450.0 million, initially threatened to exit the country by September 2022 due to the FX market impasse.
Analysts stated that this development prompted Nigeria’s Central Bank to supply $265.0 million via a special FX intervention to clear some of these backlogs and forestall the potential negative pass-through of an exit.
“The financial system liquidity remained materially tight, with interbank rates staying at 15.0% for most of August. Banks continued to queue up at the CBN discount windows to supplement liquidity, net-borrowing about N914.8 billion”.
Analysts said the strained liquidity also capped the demand for papers at the August bond auction, wherein bid-offer printed at 1.1x, compared to the year-to-date average of 2.3x. READ: Fixed Income Market Sees Yields Decline as Liquidity Pressures Ease
They noted that the average stop rate increased by 75 basis points across the 3 tenors on offer. Cardinalstone analysts wrote that investors also repriced yields higher by a mean of 84 basis points at the secondary market, in line with the auction results.
Elsewhere, the investment firm noted in its market report that the short end of the curve (≤ 1 year) stayed inverted, with 1-3 months instruments offering between 11.0% and 12.0%. Also, it hints that 270-day to 1-year papers trading lower at 7.0% to 9.0%. # Firm Sees Yields Rising as Fund Managers Sell Short-dated Bills
