Investors Earn Treasury Inflation-Exposed Returns as Naira Falls
Investors in Nigerian markets are facing a double-whammy of inflation-exposed returns and devaluation of local currency, thus funds are on the automatic decline in terms of value amidst a lack of alternative windows.
In the foreign exchange market, Nigerian local currency falls to N545 a dollar early on Monday in the parallel market. Channels check shows that some bureau de change operators exchange rate printed at N540.
With few basis points increase in yields recorded last week in the fixed income market, there is an indication that many pension funds administrators are rejigging strategies as the local bourse sees a seesaw trend.
The bearish trend in the equity space has plunged both month and year to date returns to negative, a seemingly high risk for venture for pension assets, but things aren’t staying as expected in the fixed income space.
Yields have on been on the decline as policy authority moves to reduce debt service costs pressure on the nation’s resources amidst fiscal slippage.
Cordros Capital analysts maintain a view that yields are at a resistant level and thus expect the yield to sustain decline for the second half of 2021 albeit at a slower pace underpinned by falling inflation number -supported by the gradual economy reopening and previous year high base.
Analysts recognise a deliberate reduction of government borrowing cost, thus expect yields to hover around 2020 levels, according to projection. Nigeria’s investment markets continue to denying investors inflation-protected securities amidst a slowdown in inflation and low issuance in the fixed income market.
In August, the fixed income market traded cold while the equity space witnessed strong selling rallies as the inflation rate maintain a lower downtrend for four consecutive months to 17.38% in July 2021.
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In July, yields in the fixed income market trended downwards on the back of increased maturities in the financial system, improved fundamentals in the global crude oil market, disinflationary trend, and expectations of FX stability, according to WSTC Securities.
In the Nigerian Treasury Bills primary market, the 364-Day stop rate lowered to 8.20% with yield printed at 8.93% as of the end of July 2021. The stop rate had hit 9.15% when the yield was 10.07% as of the beginning of July 2021.
In the secondary market, analysts saw the average yield on one year Federal Government financial instrument lowered to 9.23% in July 2021 from 9.73% in June 2021.
The Central Bank’s low-interest rate environment and a slowdown in headline inflation in addition to improvements in financial system liquidity continue to drive average yields in the fixed income market lower. This trend, some analysts said, would persist for the rest of the year as securities issuance drop.
“We had identified extended accommodative monetary policy, foreign exchange stability, increased domestic participation, fixed income market performance and corporate earnings as the major variables that would shape the equities market performance”, Afrinvest said in a report.
Looking forward to the other half of 2021, analysts hinted about an expectation of a rebound in equities market performance.
Afrinvest said after enduring a policy-induced low yield environment in the fourth quarter of 2020, the yield in the domestic market environment came under pressure in the first half of 2021 following rising consumer prices and a large fiscal deficit.
The investment firm noted that in the secondary Treasury bills market, the yield on the one year T-bills rose 912 basis points between January and June 2021 to 9.2%, while the yield on the 10 and 30-year sovereign bonds increased by 544 and 568 basis points respectively to 12.7% and 13.1%.
Nevertheless, it said investors continued to endure negative real returns as the gap between average inflation (17.6%) and one-year T-bills (9.2%) closed H1:2021 at 840 basis points.
Noteworthy, the CBN tightened system liquidity for the most part of H1:2021, as average system liquidity moderated from a high of N879.1 billion in the second half of 2020 to N177.2 billion in H1:2021.
Consequently, Afrinvest recorded that the Open Buy Back and overnight lending rates rose from an average of 4.1% and 4.8% in H2:2020 to 11.8% and 12.3% respectively in the first half of 2021.
This contrasts with the trend in 2020 when system liquidity surged amid an influx of open market operations (OMO) maturities and difficulty with fund repatriation by foreign portfolio investors.
Despite this, foreign portfolio investment (FPI) to the fixed income market improved to $1.4 billion in H1:2021 compared to $380.3 million in the second half of 2020.
Of this total, 89.2% came through the OMO market as the CBN lured portfolio investors with attractive yields to shore up pressured external reserves. Consequently, the OMO rate rose by 29bps to 7.7%.
“We observed that the upward trend is aimed at driving traction towards the market amid improved efforts at resuscitating the economy. In H1:2021, there was an uptick in yield globally due to assets repricing amid surging inflation and low-interest rate environment”.
For the second half of the year, analysts at Afrinvest expect the average yield to moderate marginally given our anticipation of continued accommodative monetary policy by the CBN.
Given the projection of thin paper supply and increased system liquidity levels, Afrinvest said its broad outlook for the fixed income market is that yields are expected to slightly compress from the levels last seen in the first half of 2021.
“While this outlook for a slight moderation in fixed income yields potentially could result into funds flow into the equities market, we anticipate that market participants would be reluctant in reallocating capital to equities”, the firm added.
In the first half of 2021, the Debt Management Office auctioned bond instruments worth N900.0 billion relative to N455.0 billion in the second half of 2020 at an average rate of 11.9%, an uptrend when compared with 8.2% the second half last year.
The average bid to cover ratio declined to 1.7x in H1:2021 from 5.5x in H2:2020 given the increased level of uncertainty over the short-term trajectory of yield, analysts noted.
In the OMO market, the activity level was lower as N1.1 trillion worth of instruments were auctioned compared to N1.5 trillion in the second half of 2020, while the issuances were oversubscribed at 3.7x compared to 3.4x in the latter part of 2020.
In the Treasury Bills market, the total amount offered in the first half of 2021 rose to N1.8 trillion from N1.6 trillion. Subsequently, the stop rate increased to 4.2% from 1.4% following increased issuance by the government to plug a budget shortfall.
Investors Earn Treasury Inflation-Exposed Returns as Naira Drops
