Debt Market Trades Sideway amidst Policy Uncertainty

Debt Market Trades Sideway amidst Policy Uncertainty

The Nigerian debt market (fixed income) trades sideway on Monday amidst monetary policy uncertainty, according to analysts at Chapel Hill Denham.

Yields on fixed income instruments are adjusting upward despite the apex bank pro-growth stance on the Nigerian economy.

Fixed income investors are also expecting further adjustment on yields as government is expected to raise funds to finance 2021 budget deficit via the debt market.

Noting the sizeable amount government plans to raise, coming at the time when yields on 10-years Treasury in the United States surged, investors are expecting the policy committee to adjust benchmark interest rate in the next monetary policy committee meeting.

In the money market segment, it was noted that interbank funding rates eased slightly today.

Analysts at Chapel Hill Denham said it was partly due to a bond coupon payment, but funding rates remained in double digits as liquidity remained broadly tight in the financial system.

Notably, the Open Buy Back (OBB) and Overnight (O/N) rates declined by 83 basis points (bps) and 142bps to 12.50% and 12.75% respectively.

“We expect funding pressures to ease further tomorrow, due to maturing OMO bills tomorrow (N104bn). Two more bond coupon payments are expected this week worth N91bn”, analysts said.

Chapel Hill Denham explained that the Nigerian fixed income market continued to trade sideways amid monetary policy uncertainty.

It said in the bills market, the Nigerian Treasury Bill benchmark curve closed flat an average of 2.53%, while the open market operations (OMO) curve eased.

Specifically, OMO curve dropped by 12bps to 6.62% on Monday.

However, in the bond market, yields expanded by an average of 16bps across the benchmark curve, driven by repricing at the short (+51bps to 8.24%) and intermediate (+8bps to 10.44%) end of the curve.

Today, the National Bureau of Statistics (NBS) published the Q4-2020 labour market data, which showed unemployment rate surged by 6.2 percentage points to 33.3% in in Q4-2020.

This came from 27.1% in recorded in Q2-2020, while underemployment rate declined to 22.8% from 28.6% within the same period.

Also, the NBS is expected to publish the January Consumer Price Index (CPI) data, which analysts said they expect to show a further increase in headline inflation rate.

“Although we expect month-on-month CPI growth to moderate to 1% from 1.5%, due to improvements in food supply following the border reopening, we expect year-on-year headline inflation rate to print higher by 24bps to 16.71% yoy due to low base effect”, analysts stated.

Elsewhere, in the currency market, the Nigerian local currency, Naira, strengthened marginally against the USD by N1.10 or 0.3% to 408.90 in the I&E Window.

Debt Market to Trade Quiet as Investors Search for Direction

However, the currency traded flat in the parallel market at 485.00 against the USD.

Similarly, the FX rate remained unchanged in the official and Secondary Market Intervention Sale (SMIS) segments at 379.00 and 380.69 respectively.

The external reserves maintained downward trajectory, printing lower at US$34.63 billion, having dropped 1.3% month-to-date.

Debt Market Trades Sideway amidst Policy Uncertainty