Demand for Risk-Free Debt Securities Rises, Yields Down
The fixed income market witnessed an increased demand for instruments in the just concluded week and average yield across segments were cut down further, as investors continue to earn real negative returns on double-digit headline inflation.
It was noted that yields movement reacted to surging demand at the secondary market after investors were unable to meet demand at the Treasury Bills auctions conducted by the Central Bank of Nigeria (CBN).
Fixed income traders however see the yield on instruments subdued, though yield repricing is still on the card on an expectation of a government’s large borrowing plan to finance the budget deficit.
But the Debt Management Office has paced ahead of the market expectation. The agency had earlier announced a plan to borrow N480 billion in the first three months in the fiscal year 2022.
However, as of last week, FSDH Capital said in a market report that; year to date, DMO has raised N586 billion via the Nigerian debt capital market.
While the borrowing plan has started, upward yield repricing has been elusive amidst steep inflation rate but then liquidity position has remained robust. A large bucket of funds continue to seek investment option, and there is a lack of alternative thereof. Whatever the market sees, the market takes.
In 2021, benchmark (Treasury) yields across advanced markets increased mainly due to the improved outlook for economic growth, liquidity supported by accommodative monetary and fiscal policy environments, and heightened inflation fears.
For emerging markets, yields trended lower due to strong demand from foreign investors in search of higher yields, Utica Capital said in a market report.
The firm said the key theme which will dominate the fixed income space in 2022 be the direction of monetary policy, especially in advanced markets. The general expectation is for a relatively less accommodative policy environment as central bankers look to tackle rising inflationary pressures, it said.
However, the firm said Nigeria’s case was quite different from emerging markets in general. The S&P/FMDQ Nigeria Sovereign Bond Index -which tracks prices of Nigerian Sovereigns- declined by 14.99% – implying higher yields.
This reflected apprehension towards Nigerian debt by foreign portfolio investments, FPIs, due to the delicate macroeconomic environment and the unattractive yield environment. Read: Market Witnessed Renew Appetite for Bonds despite High Inflation
Utica Capital said in its market report that the outlook for yields on Nigerian debt is highly uncertain in the financial year 2022. The government may reprice issues based on its huge funding needs -with 50% of the 2022 budget to be funded by debt, thus leading to higher yields, it noted.
However, it said currency risk and rising inflation also contribute to a higher yields case for 2022. On the other hand, Utica Capital said the Government’s significant influence on yields given the dearth of viable investment alternatives could result in rates being sticky around current levels.
Also, the firm stated that political risks could spur demand for risk-free instruments thereby driving rates lower. #Demand for Risk-Free Debt Securities Rises, Yields Down
