Weak Local Debt Issuance Tempers Optimism in Fixed Income Market
Rise in yields to slow down in the second half of 2021, says ARM Securities Limited in a new report issued today. Analysts’ projections come following a recent bullish outturn in the Nigerian Treasury bill market.
Weak local debt issuance in the Nigerian fixed income market has kept yields tight as estimate shows that financial system could face pressure in the second half of the year.
Consensus analysts forecast that yields on fixed income instrument would probably stay subdued as Nigerian government local borrowings for 2021 has been reduced by 77%.
ARM Securities affirmed this position in its latest report. In the second quarter, analysts at Atlass Portfolios projected a slowdown yield pricing for June 2021.
MarketForces Africa reported Thursday that Nigerian Treasury Bill secondary market average yields tumbled 18 basis points to close at 5.5% as investors’ maintained apathy long tenor instrument amidst inflation worries.
In projecting the direction of yield, analysts Meristem Securities said the level of subscription at Primary Market Auction (PMA) would determine yields direction going forward.
Meanwhile, records show that subscription level has remained robust, thus forcing spot rates to decline at the time market participants seek catalysts to raise returns.
In its outlook, ARM Securities said in a complete reversal of the trend witnessed in the second half of 2020, fixed income yields sustained an upward trend so much so that the average yield soared by an accumulated 591 basis points to 8.99% in the first half of the year.
The firm said modest maturity profile, relatively subdued liquidity levels and a clamour for higher yielding instruments in the primary market in the face of rising rates at OMO auctions all underpinned the bounce back in secondary market yields.
Yields reacted to pressure on funding as the financial system liquidity was boosted by a total sum of N8.04 trillion in 2021 compared with N17.31 trillion in the comparable period in 2020.
“Looking ahead to the second half of the year our expectation for the direction of yields is premised on the interplay between the demand and supply of fixed income instruments over the next 6 months”, ARM said.
In the second half of the fiscal year2021 outlook, analysts at ARM Securities noted that the main driver for demand is system liquidity which is strongly affected by the maturity profile.
They noted that despite a huge bond maturity of N561 billion expected in July 2021, the maturity profile of N3.49 trillion lies below the N4.55 trillion recorded in the first half by 23%.
“While we do not see much scope for rates to drop significantly this year, we do not rule out the possibility of a downturn as has been witnessed in previous years.
“Nonetheless, we encourage investors to play on the mid to long end of the curve to enable them to take advantage of the various yield movements through the second half of the year.” the report said.
In addition, analysts said their expectation for the direction of yields is premised on the interplay between the demand and supply of fixed income instruments over the next 6 months.
“Supply will be solely determined by the level of domestic borrowing undertaken by the Federal Government to fund their budget deficit”.
As of the end of June total net borrowing by the FG printed at N1.81 trillion which amounts to 77% of the N2.34 trillion the FG set aside for domestic borrowing in their budget.
Based on these budget numbers the FG should be issuing just about N530 billion worth of new instruments in the second half of the year, analysts said.
ARM Securities estimated that the actual budget deficit in 2021 will now print at N5.51 trillion which, when compared to the FG’s deficit estimate of N4.89 trillion, presents a funding gap of N620 billion.
“We believe that this gap will be bridged by a combination of a Eurobond issuance (which will also help address the relative scarcity of FX) and an increase in domestic borrowing, beyond what the FG specified in the budget”.
Furthermore, despite earlier proclamations made by the FG, analysts reiterate that backdoor funding from the CBN will still be accessed to bridge the funding gap.
In the fixed income space, the main driver for demand remains the financial system liquidity which is strongly affected by the maturity profile, currently.
This lower maturity profile implies less flow of funds into the system to beef up overall liquidity when compared to H1’21.
“This is not to say that system liquidity will be lower this H2 but that the increase will be at a seemingly slower pace.
“With both government borrowing and the rate of increase in system liquidity expected to slow over the second half of this year we can expect yields to remain around current levels with the possibility of a marginal uptick, but nowhere near the increase recorded in H1:2021”, ARM Securities stated.
Analysts added that a further uptick in yields could be driven by an increase in domestic borrowing thus increasing supply while also shifting from the FG’s policy of closely sticking to its borrowing target.
“Higher borrowing from the FG also means investors at auctions can bid higher rates at auctions which would then translate to higher yields in the secondary market.
“While we do not see much scope for rates to drop significantly this year, we do not rule out the possibility of a downturn as has been witnessed in previous years.
“Nonetheless, we encourage investors to play on the mid to long end of the curve to enable them to take advantage of the various yield movements through the second half of the year”, ARM Securities added.
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Weak Local Debt Issuance Tempers Optimism in Fixed Income Market
