Fixed Income: Liquidity to Dictate Market Direction

PMA: Demand for Low-risk Investment Options to Fuel Subscription

Analysts have said that increasing demand for low-risk investments option would support demand at the Federal Government bond auction on Wednesday.

Through the Debt Management Office (DMO), FG conduct a bond auction on Wednesday 17th of June 2020.

For the Primary Market Auction (PMA), the total amount on offer is expected to fall within the range of ₦135 billion to ₦165 billion.Low-risk Investment Options

Meristem Securities limited said it expects strong demand, due to excess liquidity which is partly supported by inability of foreign investors to exits the economy and lack of alternative low risk profile investments.

The firm explained that at the last PMA strong investor participation was reflected by high bid-to-cover ratios of 1.22x, 2.24x and 1.18x on the offered instruments.

Yields on government instruments have been on a decline, but liquidity in the financial system remains strong as foreign investors are locked down into the economy.

MarketForces reported that scarcity of foreign exchange has made repatriation difficult, thus forces investors to stay in the economy, analysts told MarketForces.

Meanwhile, all three instruments on offer are re-opening issues.

Current Yield Analysis:

Investor participation at Primary Market Auctions in recent sessions have expectedly remained strong, analysts at Meristem explained.

Analysts connects this to the dearth of low risk investment options amid high system liquidity, and the limitations on the repatriation of funds by foreign investors.

Meristem explained that in the secondary bond market, buying pressure has prevailed since the last auction with the average yield dropping by 39 basis points (bps) to 9.98% as at the 15th of June 2020.

This was fueled by a relatively higher liquidity in the system, as more assets filter in following the OMO maturity of ₦461.49 billion in the period.

In what appears like a second wave of the deadly coronavirus outbreak, China has recently recorded a sudden spike in new cases.

This leading to the closure of Beijing in a bid to contain the spread.

“This development has started reversing the gains that followed the production cut agreement of OPEC+, as crude-oil price is now below the USD40 per barrel mark”, analysts mentioned.

On the domestic front, although activities are beginning to gather momentum as the government continues to relax the lockdown measures in place, the number of confirmed cases has been on the rise.

Thus, analysts said gauging investing appetite, investors have remained jittery, opting for low-risk investments.

In the currency market, the uptick in oil prices has incited some accretion to the reserves and abated some of the pressure on the currency, reducing the possibility of a further devaluation.

However, this could be short-lived by another wave of COVID-19.

As mentioned earlier, demand for instruments in the market has remained strong, as the dearth of low risk investment options takes its toll on the capital market.

One of such cases, is the level of traction gained by the recent FGN Sukuk Bond which saw a subscription of ₦669.12 billion as against the ₦150 billion on offer.

Foreign Investors Shy Away from CBN OMO Auctions

“Considering the high level of subscription and the low level of allotment, we expect the demand and liquidity to be diverted to this auction”, Meristem Securities stated.

PMA: Demand for Low-risk Investment Options to Fuel Subscription

Previous articleNigeria Records Improvement in U.S Fiscal Transparency Index
Next articleFitch Ratings Estimates 31% Debt to GDP for Nigeria
MarketForces Africa, a Financial News Media Platform for Strategic Opinions about Economic Policies, Strategy & Corporate Analysis from today's Leading Professionals, Equity Analysts, Research Experts, Industrialists and, Entrepreneurs on the Risk and Opportunities Surrounding Industry Shaping Businesses and Ideas.