Yields Direction in Fixed Income Market Unclear -WSTC

Yields Direction in Fixed Income Market Unclear -WSTC

Nigeria’s fixed income market yields direction for the second half of the financial year 2021 remains unclear, analysts at WSTC Financial Limited said in a mid-year outlook report. The lack of clear yields direction was anchored on regulatory factors that analysts believe cannot be estimated.

In the report title: Restart and Beyond obtained by MarketForces Africa, the investment firm highlighted yields catalysts to include inflation expectation, size of budget deficit and financial system liquidity.  

Fixed income markets investors have been earning below Nigeria’s average inflation rate since the apex bank placed banned on individual participation in open market operations in 2019.

Though, yields on fixed instrument increased, albeit sluggishly and below pre-pandemic era as investors trade cautiously amidst a full-year inflation rate uptrend in 2020.

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However, subscription at the various market auction have remained strong, thus keeping tab on spot rates movement due to demand pressure – limited instruments supply by the CBN.

Policy authority has continued to engage in what analysts call some sort of sophisticates’ financial repression approach as investors continue to search for opportunities in the fixed income market.

Due to size of the budget deficit, Nigeria’s government has employed various policy strategies to keep low rates as a way to reduce debt costs on its total exposures.

However, in the report, WSTC believes size of fiscal deficit will influence direction of interest in the Nigerian economy in the second half of fiscal year 2021.

While analysts estimated Nigeria’s fiscal deficit of N7.52 trillion for 2021, Federal Government puts the same estimate at N6.95 trillion.  

Recently, the Nigerian Senate approved a total sum of N982 billion supplementary budget. Reacting to this, analysts said they believe that the budget approval will translate to more borrowings.

“Depending on the extent of the actual fiscal deficit, we could see a reaction in fixed income yields. A higher fiscal deficit could mean higher yields”.

Similarly, the report said that inflation expectations will also contribute to the direction of interest rate in the economy in the second phase of the year.

“Currently, we are seeing a disinflationary trend in the market, which effectively gives the CBN room for comfort. In our previous outlook, we identified the fuel subsidy removal and adjustment in electricity tariffs as two major drivers of inflation.

“However, the implementation of the two policies has been put on hold.

“Also, we are beginning to see some relative stability in the foreign exchange market due to rising crude oil prices. Increased inflows from foreign borrowings are also accretive to external reserves. Therefore, we might see a sustained disinflationary trend in the coming months”, WSTC analysts stated.

In addition, financial system liquidity position is expected to impact rates direction as analysts note the significant maturities that are likely to hit the financial system in the coming months.

“Based on our estimates, a total amount of N2.92 trillion is expected to flow into the system, in the form of fixed income maturities and coupons”, analysts said.

WSTC reckoned that this translates to N486.96 billion monthly average of liquidity, believing to set tone for fixed income rate position.

“We believe that these maturities could sway the direction of yields downwards. However, we also note that the CBN could manage the liquidity in the form of CRR debits.

“Overall, we expect to see the current yields in the fixed income market to range within a -300/+200 basis points of 8% -stop rate as of July 15, 2021- in the coming months”, WSTC said.

Also, analysts added that they expect to see the current yields in the fixed income market to range within a -300/+200 basis points of 8% -stop rate as of July 15, 2021- in the coming months.

Recall that in the first half of financial year 2021, the equities market plunged significantly due to yields repricing in the fixed income space.

The equities segment of the Nigerian Exchange tumbled by 5.87% in the first half to 37,907.28 index points, from 40,270.72 index points as at year-open.

“We recall that the equities market advanced by as much as 64.51% in the second half of 2020, induced by an unprecedented dovish stance by the monetary policy authorities”.

However, analysts at WSTC said in the report that they think the liquidity-driven event that spurred the market last year is not likely to recur.

Hence, the domestic institutional investors, that is the Pension Fund Administrators are back to allocating more funds to the fixed income market.

In the first half of the year, analysts said owing to persistently rising inflation, increased need for funds by the government to finance the budget deficit, and absorption of liquidity in the financial system, yields in the fixed income jumped significantly.  

Market data shows that benchmark yields on Federal Government of Nigeria (FGN) one-year securities advanced from an average of 1.04% at year-open to 4.24% as of the end of the first quarter and further advanced to 9.73% as of the end of the first half.

In a similar trend, yields on FGN 10-Year securities advanced from an average of 5.85% at year-open to 10.68% as of the end of Q1, and further advanced to 13.10% as of the end of H1-2021.

Read Also: Debt Market to Trade Quiet as Investors Search for Direction

At the Nigerian Treasury Bill Primary Market Auctions, stop rates on the 91-day, 182-day, and 364-day bills rose from 0.05%, 0.50%, and 1.14% at year-open to 2.50%, 3.50%, and 9.15% as of the end of H1 2021, respectively.

Yields Direction in Fixed Income Market Unclear -WSTC

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