Fixed Income Market Trades Quiet as Investors Scramble for Returns
The fixed income market dynamics is already impacting participants investing moods, and there are signs of possible adjustment following a quiet trading week.
Last week, activities in the fixed income market returned order-driven following profit taking witnessed in the prior week.
Average yield across the market plunged by 6 basis points to settle at 1.4% from 1.5% in the prior week.
Market traded on a rather calm note as investors’ attention was at first focused on the Debt Management Office (DMO) bond auction held mid-week.
Gauging the mood, investors stood at the side-line at the start of the week in anticipation of the outcome of the Bond primary market auction (PMA).
For this week, Greenwich Trust is expecting traction to persist in the forthcoming PMA with stop rates depressing further following robust system liquidity and reduced volume.
Nonetheless, analysts observed renewed buying in the bond market, particularly at the long end of the curve.
Hence, benchmark bond yields compressed by an average of 8bps week on week to 4.20%.
The financial system was broadly liquid, supported by open market operations (OMO) maturities on Tuesday valued at N281 billion and federal accounts allocation Committee (FAAC) N300 billion inflows.
Discount rates on OMO bills compressed by an average of 9 basis points (bps) to 0.13%, while the Nigerian Treasury Bills curve was flat at an average of 0.10%.
Analysts said the outcome of the DMO bond auction was mixed.
In the week, the DMO offered N80 billion which was split equally between the MAR 2035 and JUL 2045.
However, subscription level came decent at N184.74 billion, implying a bid-cover ratio of 2.3x, but much lower than 4.7x in October.
The DMO allotted the same amount offered.
Marginal rate on MAR 2035 rose by 3bps to 5.00%, while JUL 2045 cleared lower by 22bps to 4.785%.
Chapel Hill Denham hinted that the November Monetary Policy Committee (MPC) meeting is holding against a weak growth backdrop and elevated inflationary pressures.
The October Consumers Price Index report showed further uptick in inflation rate amid supply chain challenges linked to public unrest, and an underwhelming harvest season.
Notably, headline inflation rate rose for the 14th consecutive month, surging by 53bps to a 32-month high of 14.23% year on year.
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Analysts at Chapel Hill Denham said the figure is above its estimate of 14.0% and consensus forecast of 14.1% year on year.
In a related development, the Bureau of Statistics published the Q3-2020 GDP report over the weekend, which officially confirmed the economy is in a recession.
NBS data showed that Nigeria’s economic activities shrank by 3.62% year on year, albeit an improvement from -6.10% in Q2-2020 and at the lower bound of forecast range of -3.5% to -4.5%.
The CBN has made it clear in past MPC communiques that the institutional view is that inflationary pressures are mainly driven by structural factors.
As such, Chapel Hill Denham revealed expectation that the MPC will retain policy rate at 11.5%, at least until the economic recovery gains a foothold in Q2-2021.
“Despite our expectation of a status quo outcome, we expect the sovereign yield curve to remain steep, given the uncertainty regarding monetary policy outlook in 2021.
“We expect the CBN’s current dovish monetary policy bias to keep short term rates subdued, while term premiums remain high due to policy risk”, Chapel Hill Denham stated.
Fixed Income Market Trades Quiet as Investors Scramble for Returns
