Low FPIs to Ease Capital Flight Pressure in Fixed Income Market if U.S Hikes Rate
An expected capital flight that will follow the United States interest rate hike would have minimal impacts on Nigeria’s fixed income market due to low foreign portfolio investors in the space, ARM Securities Limited said in an outlook for the year.
Reacting to MarketForces Africa request for a view on the rates hike in the global space by bellwether economies, traders said it is no more a matter of if but when the United States will raise the interest rate.
Based on the latest data, there is minimal participation of foreign investors in the Nigerian financial markets. In the equity space, local investors have been dominating trading activities, according to the Nigerian Exchange. Read: Local Investors Dominate Stock Market as FPIs Move Out
Due to what some market critics’ tagged financial repression by the Nigerian government, unattractive returns that follow high headline inflation and lower spot pricing have made the fixed income market relatively unattractive.
Due to dollar repatriation restrictions by the Central Bank of Nigeria (CBN), and FX backlog, foreign investors have moved aside their portfolio investments. An interest rate hike in advanced economies could likely trigger adjustments in the frontier and emerging markets, according to analysts’ views.
And the United States is moving towards twice an increase in interest rate in 2022, the plan which is expected to commence in March 2022 according to Federal Open Market Committee – all things being equal.
Meanwhile, ARM Securities said the outlook for the fixed income market in 2022 is hinged on key factors that analysts believe would largely influence yields movement.
It mentioned that global and domestic monetary policy direction, domestic fiscal policy direction, expected maturities, and pre-election jitters would shape the market direction in the current year.
Amidst the bond-buying slowdown, Federal Reserve Chairman Jerome Powell has indicated a move to monetary policy tightening in a fast and furious manner that has sent Treasury yields higher.
Like US Fed, other global systemically important central banks have signalled the return to a tightening stance with a reduction in asset purchases and proposed hikes in rates in 2022.
In the United States, a multiple interest rates hike is expected amidst rising inflation rates propelled by higher energy costs. ARM Securities then hint that higher rates in the advanced economies would trigger selloffs in emerging markets, hence, necessitating higher yields in these markets.
In Nigeria, monetary policy rates have remained unchallenged since the third quarter of 2020 at 11.5%, according to data obtained from the CBN website. Read: Yields Direction in Fixed Income Market Unclear -WSTC
The CBN would need to guide marginal rates at auctions higher to retain flows and steer secondary market yields in the same directions, ARM Securities said in the outlook for the year.
“Although we believe that capital flight should have minimal impact on the fixed income (excluding Open Market Operations) markets as foreign investor participation in the T-bills and bonds market is currently low.
“…significant higher rates at the OMO auction may induce local participants to reprice instruments in these markets as recorded in the first half of 2021”, it said.
According to the firm, the fixed income market realities in 2021 was a game of two halves that manifested a stark contrast in direction. While the market recorded a surge of 587 basis points in average yields to 10.19% in the first half of 2021, the latter half was headlined by 95 basis points contraction in secondary market yields to 9.25%.
The investment firm said in the report that the selloffs in the first half of 2021 were marked by a flurry of cash reserve ratio (CRR) debits that drained system liquidity.
Consequent to tightened liquidity in the financial system and banks need to maintain a cash position in line with regulatory requirements, fixed deposit rates inched higher.
CBN raised the marginal rates at OMOs auctions to retain foreign portfolio investments (FPI) flows, and this heightened the clamour for higher yields at the fixed income market by local investors.
On the supply side, analysts revealed the government through the Debt Management Office (DMO) borrowed ₦1.42 trillion in the first half of 2021 out of the budgeted ₦2.7 trillion. Net issuances – issuances net of maturities- in the T-bills segment in the second half of the same year totalled ₦1.25 trillion, according to the report.
Last year, ARM analysts said the Federal Government’s net borrowing at both the short and long end of the market totalled ₦5.06 trillion, split as ₦2.05 trillion via bonds while T-bills raised printed at ₦3.01 trillion. #Low FPIs to Ease Capital Flight Pressure in Fixed Income Market if U.S Hike Rate
