The fixed income secondary market continued its bullish run from the previous week across all maturities with the greatest impact felt on the short term maturities and the 16.39% FGN January 2022 bond. The major driver was the aggressive demand at the treasury bills primary auction, which drove down the discount rates of the 182 and 364 days bills to 15.50% and 15.55% from 16.0975 and 16.899% respectively. However, there was a slight increase in the stop rate for the 91 day treasury bills from 14.70% to 14.80%. Expectedly, the 5.50 19 February 2013 FGN bond stopped trading as a result of the term to maturity dropping below one year whilst the 9.50 23 Feb 2012, worth N35.0 billion, matured.
Our outlook for the week supports a continued bullish trend in the short term maturities due to the attractiveness of the yields but a slowdown in demand in the bonds market considering the FGN bond primary auction scheduled for midweek. The DMO will be offering about N70 billion worth of FGN bonds at the primary auction; N35 billion each of 7.00% October 2019 and 16.39% January 2022 which are trading at 16.03% and 15.95% respectively in the secondary market.
Also, the release of the consumer inflation during the week shows a significant rise in the CPI to 12.60% in January 2012, from 10.30% in December 2011. The increase in inflation rate is a result of the partial removal of the petroleum subsidy, which triggered a spike in food and non-food items as a result of the increase in transportation costs. However, we are inclined to highlight that real rate in the economy still remains positive given the average yields on government bonds and treasuries are ahead of inflation by c. 260 and 314 basis points respectively. (fig. 3)
We are however of the opinion that, despite the increase in CPI, monetary authorities should hold benchmark rate at the current level – or possibly reverse the current policy stance - and seek to stimulate economic growth. We believe that further increase in the benchmark rate to address inflationary pressure will lead to a possible reversal of the growth of the domestic bond market and further stifle the flow of the long term funding to the real economy. At present, we note the current threat facing the bond market in Nigeria in view of the high rates obtainable in the money markets.
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