Market Anticipates Volatile Rates on Debt Issuance Pre-Election Year
Spot rates on debt securities issued were subdued in the latter part of 2021. In the new year, due to pre-election year dynamics, analysts said they expect rates on debt issuance to be volatile.
Interest yield volatility has been anticipated in the fixed income securities market pre-election year, Cowry Asset Fixed Income Trader Oluwafemi Osinubi told MarketForces Africa in a chat.
The projection is anchored on the expectation that the Central Bank of Nigeria would hold off adjustment to policy rates following gradual economic recovery and inflation rate slow down.
Ahead of the implementation of the nation’s debt strategy in 2022, the Federal Government of Nigeria bond market yield has remained subdued since the second quarter of 2021.
In the first half of 2021, higher debt issuance by the Debt Management Office had pushed the rates on instruments upward. In the secondary market, there was higher yield repricing which slowdown just after.
In the second half of 2021, the fixed income market was subdued due to robust subscription levels at primary market auctions, stop rates on debt instruments moderated as the Debt office met borrowing targets just in time before the October Eurobond call.
Also, spot rates on Treasury bills sold by Central Bank tumbled in the same manner, though still closed higher than the instruments opening position in the year.
Some analysts think rising inflation rate and attendance increase in interest rate in addition to Federal Reserve fast and furious hawkish poise would drive benchmark rate higher in frontier and emerging markets.
However, Central Bank has maintained a loose monetary policy with a low-interest rate environment following its pro-growth stance.
However, with interest rate heat up in the United States followed by adjustment in other frontier and emerging markets, Cowry Asset Management Osinubi ruled out the possibility of an interest rate hike in 2022.
United States Federal Reserve’s fast and furious hawkish poise has been pointed as a downside for frontier and emerging market investment climates. In 2021, Fitch Ratings observed in the report that frontier markets adjusted interest rates to combat the rising inflation.
Tagged as an unwelcome guest by Moody’s analysts, the headline inflation rate increased in the United States and other major economies- driven in part by an energy crisis, covid-19 related pressures and rising crude oil.
Noting the development, some analysts are predicting that there will be a possible interest rate hike in Nigeria as the headline inflation rate moderated for 8-month consecutively, from 18.17% in March to 15.40 in November 2021.
In a chat with MarketForces Africa, Osinubi said its firm, Cowry Research is of the opinion that the monetary authority would sustain its expansionary policy so as to keep supporting the fiscal authority in its effort to boost economic activities.
Hence, Osinubi said analysts at the investment banking firm do not anticipate any possible increase in monetary policy rate (MPR) in 2022.
Nevertheless, he said given the increased level of a budget deficit of close to N7 trillion in 2022 and the anticipation of a volatile foreign exchange rate in the pre-election year, analysts at the firm are expecting stop rates on debt issuances to be relatively volatile.
Leaning on past experience, he said Cowry Asset expects a strong demand for foreign currency which usually accompanies pre-election year to negatively impact the exchange rate.
This could lead to the depreciation of the Naira against other foreign currencies, especially the United States dollar.
In addition, Cowry Asset analyst anticipates a reasonable fluctuation of the stop rates on bonds and T-bills maturities that would be issued by the Debt Management Office (DMO) and the Central Bank of Nigeria (CBN) in 2022.
“The actions of the issuing authorities and the anticipated sell-off by some investors to boost liquidity, are expected to impact on the secondary market yields, particularly, at the longer end of the curve”, Osinubi told MarketForces Africa.
“Hence, yields at the longer end of the curve should swing between a higher band of 12.50% and 14.50% as traders adjust to market reality while rates in the money market would range between 2.5% and 8.00% across 91-day to 364-day maturities”.
Osinubi told MarketForces Africa that the cost-push inflation rate that Nigeria is grappling with, would limit the decision of the monetary authority to increase the benchmark rate. He expressed a view that this could impact negatively on the country’s economic growth.
“We are unlikely to see inflation rate induce upward revision of the interest rate in 2022 despite the pre-election year spending which may give rise to a different form of inflation (demand-pull)”, Osinubi said.
According to him, Cowry Research feels that the demand-pull inflation which may be witnessed in the pre-election year would be transient; hence, the monetary authority is less likely to battle this form of inflation with a rate hike.
“For us, we don’t see much of foreign portfolio involvement in the fixed income space amid foreign exchange risk. Thus, we rule out the possibility of the MPC enticing the FPIs with a juicy rate. This further strengthens our position of monetary policy rate staying put at 11.50%”, he said.
Osinubi explains that the increase in local bond yields would further be exacerbated by the rush for FGN Eurobonds which investors would see as a haven during this electioneering period.
“We expect a lot of conversion of Naira denominated assets to dollar-denominated assets and this singular investor action would further put pressure on the local currency and local bond yields”.
Cowry Asset analyst Osinubi said the swing in bond yields between 12.50% and 14.00% in the year 2022 would chiefly be based on the forces of demand and supply amid market dynamics.
“Even as the fiscal authority marginally increases the cost of debt on the issued maturities will further stimulate subscriptions amid large budget deficit in 2022”, he said. #Rates on Debt Issuance to Be Volatile Pre-Election Year – Analysts
Read Also: UNCTAD Anticipates Further Weakness as Global Investment…
