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Bond, Treasury Yields Mixed on Interest Rate Hike Expectation

Bond, Treasury Yields Mixed on Interest Rate Hike Expectation

Bond, Treasury Yields Mixed on Interest Rate Hike Expectation

The average yield on the Federal Government of Nigeria (FGN) tracked lower as trading activities in the secondary market resumes an initial bullish trend amidst rising inflation threat on naira assets. The market is awaiting the monetary policy committee’s decision on the policy rate as inflation rate crosses 21%. 

Investors are adjusting as the fixed income market started to see cautious gameplay by key market participants.  Yields have been uptrend, a move spurred by interest rate hikes. On the other hand, the equities segment of the Nigerian Exchange has tumbled from its year high.

Ahead of the monetary policy committee meeting, some analysts are already projecting that the apex bank will heat up a hawkish tone with further monetary policy tightening.  This would be positive for Nigerian banks, including institutional investors, especially pension funds managers with large investment outlay in short and long-dated government securities.

However, yields curve across instruments back down from making an upward trajectory on inflation fears while the market ponders ahead of policy meeting outcomes next week. READ: Rates on Govt. Bonds Rise as Traders Dump Debt Instruments

Next week,  the Central Bank of Nigeria (CBN) monetary policy committee is expected to hold their final meeting to deliberate on what is next as 400 basis points interest rate hikes booked between May and September 2022 have not achieved the target in total.

The inflation rate surged to 21.09% in October, according to the National Bureau of Statistics while the Nigerian naira has lost significant value across the foreign exchange market. Short-term interest rates have reversed to double-digit highs after pressures in the financial system liquidity filter into the money market segment.

Data from FMDQ Exchange indicates that the Open Buyback Rate (OPR) rose 8 basis points to 16.25% and the Overnight Lending Rate (OVN) stayed flat at 16.50% from the last close. In a market report, analysts at Cordros Capital said the system liquidity closed in a net long position of N131.44 billion.

Traders said trading activities in the Treasury bills secondary market were bearish yesterday with pockets of trades spotted across the curve. Due to investors’ decision to sell down their portfolio holdings, the average yield expanded by 11 basis points to 10.7%.

Across the curve, traders’ notes indicate that the average yield was flat at the short and long ends but expanded at the mid (+21bps) segment following the sell-off of the 99-day to maturity(+168bps) bill.

Elsewhere, the average yield remained at 10.2% in the OMO bill segment after last week’s open market operation auction conducted by the CBN where market participants accepted flattish spot rates.  In the bonds secondary market, trading activities move against patterns in the Treasury bill segment with buying momentum.

Consequent to the bullish sentiments, the average yield dipped by 6 basis points to 14.4%. Across the benchmark curve, Cordros Capital stated that the average yield closed flat at the short end but contracted at the mid (-9bps) and long (-11bps) segments following demand for the APR-2029 (-10bps) and MAR-2050 (-22bps) bonds, respectively.

At the close of today, the 26-APR-2049 and 27-MAR-2050 instruments were the best performers.

Meanwhile, the value of the FGN Eurobond closed lower for all maturities tracked by waning sentiment. Hence, the average yield was down 10 basis points as it closed at 11.41%, analysts at Cowry Asset said in a note. # Bond, Treasury Yields Mixed on Interest Rate Hike Expectation

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