Fixed Income Securities Yields Slowdown Dampens Investors Moods
There is no respite in sight as fixed income instruments continue to record yields slowdown in the second half of 2021 after an impressive position in the first half of the year. As such, hedging against inflation has produced lower than sufficient annualise returns. MarketForces Africa gathered that Nigeria’s financial market currently has no treasury-inflation protected securities despite a surge in price levels.
While the Nigerian stock market remains volatile with seesaw prices movement, there is systemic induced financial repression in the fixed income space. The Nigerian government, in an effort to drive down debt services costs, have kept issuance lower, the rate on instruments slide.
Looking at the market direction, analysts believe that the current trend will keep investors returns tight from an inflation angle and persistent devaluation of the local currency but the lower issue would further worsen the yield outlook.
While investors search for catalysts, analysts at CardinalStone said in a report that the medium term expenditure framework (MTEF) estimates the 2021 budgetary deficit at N5.6 trillion, which is to be partly funded by domestic and foreign borrowings in equal proportion remains one of the keys drivers in the period.
After a total sum of N1.81 trillion raise in the first half from the Treasury market, analysts said a combined net issuance of about N1.3 trillion would be needed to meet the domestic budgetary borrowing target for the year.
In a report, CardinalStone said the 2035 and 2050 instruments – conduits for about 80.4% of the last FGN bond raise in the first half of the year- are discount bonds, suggesting that the net issuances may have to be much higher than N1.3 trillion.
“Assuming the 35.2% excess issuance over maturities in the first half subsists, our overall prediction for gross issuance at the NTB and bond fronts is about N2.2 trillion and about N1.3 trillion, respectively, for the second half of the year”
Recalled the fixed interest securities market turned the corner following a slowdown in inflation worries, widening negative returns in the market
Last week, the interbank market, system liquidity trended lower as debits from the oversold FGN bond auction which printed at N260.0 billion allotted as against N150.0 billion offered weighed despite OMO maturities worth N91.0 billion.
Consequently, the open buy back and overnight lending rates both ticked higher by 658 basis to 23.33% and 23.83%, respectively. In the NT-bills secondary market, performance was also flattish with marginal bearish sentiments as average yield rose marginally by 2 basis points to close at 4.69% from 4.67% in the previous week’s session.
The turgid yield movement in secondary market T-bills yields showed the market took a breather after consecutive weeks of strong bullish sentiments.
On other hand, analysts at United Capital said they saw bullish sentiments in the secondary OMO bills market as the average yield closed lower at 5.95%, 170bps short of the previous Friday’s close.
Projecting for the week, analysts said they expect system liquidity to trend higher as a result of Federation Accounts Allocated Committee inflows expected this week.
Also noted is the expectation of an inflow from OMO maturities worth N157.3 billion to hit the financial system in the coming week, as analysts said these inflows are expected to ease the pressure on interbank rates.
Central Bank of Nigeria (CBN) is scheduled to conduct a T-bills auction worth N157.2 billion on Wednesday to roll over an equivalent maturing amount. At the auction, analysts at United Capital said they expect the trend of huge demand from investors and overselling by the CBN to continue.
“We expect the stop rates to trend southwards, sparking another round of bullish sentiments in the secondary T-bills market”, United Capital projected.
Debt Management Office (DMO) conducted a Federal Government bond auction, selling a total of N260.0 billion, compared with the N150.0 billion volume on offer across the three maturities.
Investors’ demand was strong as all bonds on offer were oversubscribed with the 2028s, 2036s and 2050s recording subscriptions rate of 1.21x, 1.15x and 1.69x respectively.
In addition, the marginal rates closed lower, with the 2028s, 2036s and 2050s closing at 11.6%, 12.75% and 12.80%, from 12.35%, 13.15% and 13.25% at the previous auction.
In the secondary market, performance was reflective of the outcome of the auction in the primary market as investors who could not get their orders filled flocked to the secondary market, driving average yield downward by 18bps to 11.38% from 11.56% in the previous week.
In the corporate segment, average yield simultaneously declined by 22 basis points to 12.03% from 12.25% in the prior week.
Analysts said financial system liquidity is likely to remain tight in the second half of 2021, with expected OMO maturities of N1.2 trillion, which is 61.6% lower than total maturities in the first half of the year and bond maturity at a low N561 billion for the rest of the year.
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CardinalStone analysts noted the likelihood of sustained intermittent and unpredictable CRR debits, saying that latitude for continued net issuances on the NTB and bond fronts, to meet high fiscal borrowing needs, are also likely to reduce system liquidity. However, analysts expressed that improved FAAC disbursements on higher oil prices could slightly offset some liquidity pressure.
Fixed Income Securities Yields Slowdown Dampens Investors Moods
