Subsisting Bearish Pattern Dominates Fixed Income Market
In the opening trading session of the New Year, sentiments in the fixed income market remained mixed, albeit with the subsisting bearish pattern dominating.
Amidst strong liquidity, interbank liquidity remained robust Monday, although funding rates edged slightly higher.
Notably, the Open Buy Back (OBB) and the Overnight (OVN) rates rose by 50bps and 150bps to 1.00% and 1.50% respectively.
“We expect funding pressures to remain benign in the near term, with Open Market Operations (OMO) maturities totaling (N410.04bn) expected to hit the system”, Chapel Hill Denham stated in a note.
At the short end of the curve, rates were broadly flattish, as the Nigerian Treasury Bills and OMO benchmark curves closed flat at an average of 0.44% and 0.67% respectively.
However, bonds remained bearish, as the benchmark curve expanded by 21bps to 6.53%, driven by selling at the long end of the curve.
The upward repricing of yields in the final week of December ensured Nigerian bonds closed the month with its worst monthly performance (-10.9%) month on month since the COVID-19 induced selloff in March 2020 (-11.3%).
Notwithstanding, the S&P FMDQ bond index returned 39.3% year on year in 2020, as yields compressed by 515bps across the benchmark curve, marking the best annual performance of the index since inception.
While the case for Nigerian fixed income is considerably weakened, analysts at Chapel Hill Denham said the firm think January should prove relatively resilient for the market, based on liquidity condition and neutral outcome of the January MPC meeting.
While OMO repayment is expected decline by 42% to N1.0 trillion, bond coupon payments are elevated in the month at N193 billion.
Analysts said this should provide a favourable liquidity backdrop, but the Debt Management Office is expected to turn more aggressive in the primary market as it begins implementing the domestic borrowing plan for the 2021 budget.
Sentiments were mixed in the final trading week of 2020, albeit with a bearish bias, as investors continued to offload bonds to book profit.
Against this backdrop, benchmark bond yields expanded by an average of 13bps wow to 6.32%, mainly due to selloff at the belly of the curve, while long-duration bonds recovered.
Similarly, short term rates were mixed, with the NTB benchmark curve expanding by 5bps wow to 0.42% while the OMO curve eased by 7bps wow to 0.58%.
The final NTB auction also held last week.
The CBN, on behalf of the DMO, offered N77.84 billion. Subscription level was decent at N171.42 billion, implying a bid-cover ratio of 2.29x.
However, the CBN allotted the same amount offered, while the direction of stop rates differed across tenors.
The 91-day cleared lower by 1bp to 0.035%, 182-day was unchanged at 0.50%, while the 364-day inched higher by 6bps to 1.210%.
Despite the selloff over the past month, analysts at Chapel Hill Denham think fixed-income yields remain overvalued, based on external accounts and inflation expectation.
Analysts expect inflationary pressures to remain elevated in 2021, particularly in the first half of the year.
This was due to further adjustments in fuel prices, subsisting supply chain challenges, further FX devaluation and low base effect.
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Subsisting Bearish Pattern Dominates Fixed Income Market
